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Gujarat Gas Financial Services Ltd. Vs. ACIT - Section 28(i) of the Income-tax Act, 1961, read with section 2(5B) of Interest-tax Act, 1974 - Business income - Chargeable as [Interest] - Assessment year 1999-2000.
February, 21st 2014
      IN THE INCOME TAX APPELLATE TRIBUNAL,
           SPECIAL BENCH `A', AHMEDABAD
       Before Shri G C GUPTA, HON'BLE VICE PRESIDENT,
            Shri D. K. TYAGI, JUDICIAL MEMBER and
         Shri A. K. GARODIA, ACCOUNTANT MEMBER

                  Interest Tax Appeal No.36 / Ahd/2004
                       (Assessment year 1999-2000)

Gujarat Gas Financial Services       Vs.      ACIT, Circle 4,
Ltd.,                                         Ahmedabad
2, Shantisadan Society,
Near Parimal Crossing,
Ellisbridge, Ahmedabad

       PAN/GIR No. : AAACG5584E

                         C.O. No.48/Ahd/2004
                      (Assessment year 1999-2000)

ACIT, Circle 4,           Vs.    Gujarat Gas Financial Services Ltd.,
Ahmedabad                        2, Shantisadan Societ,
                                 Near Parimal Crossing, Ellisbridge,
                                 Ahmedabad

         (APPELLANT)                    ..         (RESPONDENT)

          Appellant by:                 Shri S N Soparkar,
                                        Ms. Urvashi Shodhan, ARs,
          Respondent by:                Shri Ravinder Kr., CIT DR,
                                        Shri Rahul Kumar, Sr. DR

             Date of hearing:       08.03.2013
             Date of pronouncement: 17.04.2013
                              ORDER

PER SHRI A. K. GARODIA, AM:-

      As per the order of the Hon'ble President, ITAT, the following
question was referred to the Special Bench for its decision:
                                    2                    I.T.A.No. 36 /Ahd/2004
                                                           C.O. No.48/Ahd/2004




      "Whether on the facts and in the circumstances of the c ase, the
      assessee company is a financial company under the Interest Tax
      Act, 1974, liable to tax there under and if yes, then which portion
      of the income/receipts of the assessee company can be considered
      `chargeable interest' under Interest Tax Act, 1974.

2.    We feel it proper that we should note down the history of this case.
From the records, it is seen that initially, reference was made by a
Division Bench to Hon'ble President, ITAT for constitution of Special
Bench in only one appeal under Interest Tax Act being Interest Tax
Appeal No.36/Ahd/2004 for the assessment year 1999-2000 dated
22.09.2006.    Thereafter, Special Bench was constituted by Hon'ble
President, ITAT and the following question was referred to it:
      "Whether in the facts and in the circumstances of the case, the
      assessee company, a non banking financial company (NBFC) u/s
      45-I(f) of the Non Banking Finance Companies Act, 1997, is a
      financial company under the Interest Tax Act, 1974, liable to tax
      there-under on the revenue income earned on its financial
      transactions ?"

3.    Subsequently, there was a request from the Revenue as per
application dated 01.05.2007 and 19.06.2007 requesting for clubbing and
fixing one more interest tax appeal and three income tax appeals along
with this appeal for which Special Bench has already been constituted.
As per the order passed by the Hon'ble President, ITAT on 28.6.2007, it
was the direction of the Hon'ble President, ITAT that `Special Bench
may club if deem it proper'. Thereafter, all these four appeals were also
clubbed   in   Special   Bench    along   with    Interest   Tax     Appeal
No.36/Ahd/2004 but the question before the Special Bench remained the
same which was referred to the Hon'ble President, ITAT for formation of
Special Bench in Interest Tax Appeal No.36/Ahd/2004, which is already
reproduced in para 2 above. The special bench decided all these five
                                    3                    I.T.A.No. 36 /Ahd/2004
                                                           C.O. No.48/Ahd/2004




appeals as per order passed by it on 19.09.2008. Thereafter, the assessee
filed appeal before Hon'ble Gujarat High Court against this decision of
the Special Bench of the Tribunal and as per the judgement of Hon'ble
Gujarat High Court rendered on 13.04.2010, the order of the Special
bench of the Tribunal was set aside and the entire matter was restored
back to the file of the Tribunal for afresh decision with the following
direction:
      "The Court considered the alternative of deciding those appeals
      which could be decided independently. However, on going through
      the impugned order of Tribunal, it is not possible to state to what
      extent the order of the Tribunal stands vitiated by application of
      wrong principles by referring to provisions under a different
      Statute. Hence, without formulating any question in any of the
      appeals, the impugned order of Tribunal dated 19lh September,
      2008 is hereby quashed and set aside and all the appeals being
      Interest Tax Appeal No.36/Ahd/2004 with interest Tax Appeal
      No.48/Ahd/2004 and Income Tax Appeal No.35/Ahd/2005 with
      Income Tax Appeal No.l095/Ahd/2006 with Income Tax Appeal
      No.515/Ahd/2005 are restored to file of the Tribunal for being
      decided afresh independently as separate groups under two
      different statutes. The appeals stand disposed of accordingly. The
      questions formulated in Tax Appeals No.153/2009 and 154/2009
      are, therefore left unanswered."

4.    Subsequently, as per the order passed by Hon'ble President, ITAT,
Special Bench was constituted for all these 5 appeals which included two
appeals under Interest Tax Act and 3 appeals under Income Tax Act. As
per the subsequent development and as per subsequent order of Hon'ble
President, ITAT, 3 income tax appeals were de-linked from Special
Bench and were referred to Division Bench and the question originally
framed was also revised and as per such order, the present question
before the Special bench of the Tribunal has come into picture.
                                        4                     I.T.A.No. 36 /Ahd/2004
                                                                C.O. No.48/Ahd/2004




5.       At the time of hearing, it was submitted by the Ld. A.R. that on
page 82 of the departmental paper book is the provisions of Section 2(5B)
of Interest Tax Act, 1974. For the sake of ready reference, we reproduce
the provisions of Section 2(5B) of Interest Tax Act, 1974, which read as
under:
         "(5B) "financial company" means a company, other than a
         company referred' to in sub-clause (/), (if) or (Hi) of clause (5A),
         being--
         (i) a hire-purchase finance company, that is to say, 'accompany
         which carries on, as its principal business, hire-purchase
         transactions or the financing of such transactions; (if) 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;
         (iii) a housing finance company, that is to say, .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;
         (iv) a loan company, that is to say, a company [not being a
         company referred to in sub-clauses (/) to (Hi)] 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 620 A - of the Companies
         Act, 1956 (1 of 1956), to be a Nidhi or Mutual Benefit Society;
         [(va) a residuary non-banking company [other than a financial
         company referred to in sub-clause (/), (H), (Hi), (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]
                                     5                    I.T.A.No. 36 /Ahd/2004
                                                            C.O. No.48/Ahd/2004




      (v) 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;]."

6.    He further submitted that the principal activities of the assessee
company is leasing which is not covered u/s 2(5B) and, therefore, the
assessee company is not liable to Interest Tax. At this juncture, a query
was raised by the Bench that as per clause (iv) of sub-section (5B) of
Section 2 of the Interest Tax Act 1974, it is provided that a loan company
which carries on as its principal business, the business of providing
finance whether by making loan or advances or otherwise is also a
financial company. Hence, even if the assessee's principal activity is
leasing and such leasing is financial leasing then how the same is not
covered under this clause (iv) of Section 2(5B) of Interests Tax Act 1974.
In reply, it was submitted by the Ld. A.R. that this aspect was never
examined at any level as to whether the leasing activities undertaken by
the assessee was operating leasing or financial leasing. His submission
was this that the assessee is engaged in operating leasing. Ld. A.R. also
relied on the following judicial pronouncements:
      i)     296 ITR 126 (Del.) CIT Vs Eicher Good Earth Ltd.
      ii)    74 ITR 01 (Cal.) Nirmala Bala Sarkar Vs CIT
7.    As against this, it was submitted by the Ld. D.R. that on page 28 of
the decision of Special bench of the Tribunal in assessee's own case , it
was noted by the tribunal in para 39 that the assessee vide his letter dated
06.12.2006 has submitted that the assessee was engaged in only financial
leasing and not operational leasing.      He further submitted that the
contents of this letter were reproduced by the Tribunal on the same page.
                                    6                     I.T.A.No. 36 /Ahd/2004
                                                            C.O. No.48/Ahd/2004




He also submitted written submission of 10 pages, which are reproduced
below:


                         "Government of India
                              office of the
                    Commissioner of Income-tax (DR),
                   (ITAT) -I 2ND floor, neptune tower,
                       Ashram road, ahmedabad.
      ________________phone No. (079) 26581651________________
         No. CIT(DR)/ITAT-I/Gujarat Gas/2012-13 Date: 08.03.2013
      To
      The Hon'ble Members,
      Income Tax Appellate Tribunal,
      'A' Bench (Special Bench), Ahmedabad.

      Respected Sirs,
      Sub:- ITA No. 36/A/2004 & 48/Ahd/2004 for A.Y. 1999-2000 in
      the case of Gujarat Gas Financial Services Ltd., Ahmedabad.
      Kindly refer to the above.
      2 The CIT(A) has directed that the sum of Rs. 2,78,98,000/- being
      receipt of lease rental Income are excluded from income
      chargeable to interest tax. In this regard, it is pointed out that the
      lease income can be considered to be lease income as such, only if
      the lease is an Operating Lease. In case of a financial lease the
      transaction has to be treated as a loan transaction. The most
      important issue in this case is to determine the true nature of
      transaction before any conclusion can be drawn. The question of
      form over substance is vital to decide whether the lease
      transactions are operating leases or finance lease which are
      actually like loan transactions. The importance of substance over
      form is clearly brought in the following judgments of Hon'ble
      Supreme Court of India.
      (i)     CIT Vs. Durga Prasad More - 82 ITR 540 (SC) - Page No. 1
      to 6 of paper
      book, (ii)     Controller of Estate Duty Vs. Aloke Mitra - 126 ITR
      599 (SC) - Page No. 7 to
      18 of paper book, (iii)     Lalsingh Estate Finance Ltd. Vs. CIT -
      216 ITR 644 (Gau.) - Page No. 199 to
                              7                     I.T.A.No. 36 /Ahd/2004
                                                      C.O. No.48/Ahd/2004




203 of paper book.
3 The Supreme Court in the case of Asea Brown Boveri Ltd. Vs.
Industrial Finance Corp. of India reported in (2006 )154 Taxman
512(SC) has made a distinction between an operating lease and a
financial lease and held that in case of finance lease, it is lessee
who for all practical purposes is the owner of the assets and not
the lessor. In fact, the financial lease is more like a loan (page no.
58 to 63 of paper book).
4 In that case the assessee took 56 cars on lease from Fair Growth
Financial Services Ltd. for which, it deposited total security of Rs.
20,97,447/- with the lesser. The total rent payable for 5 years
period amounted to Rs. 85,80,6634/- As per the terms of lease
finance agreement, the assessee was required to pay 25% of the
purchase price of the cars as security deposit carrying interest @
5% per annum. In pursuance to the terms of this agreement the
assessee had to deposit Rs. 20,97,447/- as mentioned above and
against the balance amount, the assessee was required to pay
Rs.85,35,379/- as lease during the period of 5 years. Fair Growth
become a notified party under Sub-Section 2 of section of Special
Court (Trial of offences Relating to Transaction in securities Act,
1962 due to certain illegal transactions and the and the Industrial
Finance Corp. of India(IFCI) became the custodian of the assets
belonging to Fair Growth . The assessee company continued to
make the payment to IFCI in place of Fair Growth as per the
Lease Finance Agreement. An amount of Rs. 30,96,948/- was paid
by the assessee to Fair Growth till December, 1992 while the
amount of Rs. 44,612,273/-was paid to the custodian IFCI. The
assessee made a communication to the custodian clarifying that
the assessee would be entitled under the agreement to the amount
on account of security deposit and interest accrued thereon at the
time of buy-back of purchase of leased assets. Accordingly, it
forwarded a cheque of Rs. 17,800/- in their favour and final
settlement of the dues under the lease agreement. The Special
Court u/s. 10 passed an order to handover the possession of all the
56 cars to the custodian within one week from date of the order
since the assessee has failed to make the payment as per the lease
agreement. The assessee has taken a plea before the Special Court
that it was a case of lease finance but the said plea had been
rejected on the ground that in the pleadings the assessee had
termed the agreement as "lease agreement". The matter was
carried in appeal. In appeal the Supreme Court posed the question
                               8                     I.T.A.No. 36 /Ahd/2004
                                                       C.O. No.48/Ahd/2004







for adjudication whether the agreement between the parties was a
finance lease or not. Various meaning of the term finance lease
etc. were referred to and discussed:
(i)          Accounting and Finance by R. Brockkington (Pitman
publishing Universal Book Trder, 1996 at page 136)
"A Finance Lease is one where the Lessessee uses the asset for
Substantially the whole of its useful life and the lease payments are
calculated to cover the full cost together with interest charges. It is
thus a disguised way of purchasing the asset with the help of a
loan. SSAP 23 required that assets held under a finance lease be
treated on the balance sheet in the same way, as if they had been
purchased and a loan had been taken out to enable this
"(Emphasis supplied)
(ii)        Lease financing &Hire Purchase by Dr. J,C. Verma(4th
Edition, 1999 at (Page-33)
"Financial lease is a longer term lease on fixed assets, it may not
be cancelled by either party. It is a source of long term funds and
serves as an alternative of long tern debt financing. In financial
lease, the leasing company buys the equipment and leases it out to
the use of a person known as the lessee It is a full pay out lessor
that exceeds the purchase price of the leased property and finance
cost.
Financial lease has been defined by International Accounting
Standards Committee as a lease that transfers substantially all the
risks and rewards incident to ownership of an asset. Title may or
may not eventually be transferred. Lessor is only a financier and it
is not interested in the assets. This is the reason that financial
lease is known as full payout lease where contract is irrecoverable
for the primary lease period and the rentals payable during which
period are supposed to be adequate to recover the total investment
in the asset made by the lessor" (iii)       Lease Financing & Hire
Purchased by Vinod Kothari (Second Edition, 198 at Pages-6&7)
"A financial lease is a contract involving payment over an
obligatory period of specified sums sufficient in total to amortise
the capital outlay of the lessor and give some profit.
An operating lease is an other type of lease that is to say, where
the asset is not wholly amortised during the not-cancellable
period, if any, of the lease and where the lessor does not rely for
his profit, on the rentals in the non-cancellable period".
                               9                      I.T.A.No. 36 /Ahd/2004
                                                        C.O. No.48/Ahd/2004




5.      After considering the aforesaid definitions of lease finance,
the Supreme Court observed that following are the features of the
financial lease
1. The asset is use specific and is selected for the lease specifically.
Usually, the lessee is allowed to select it himself.
2. The risks and rewards incident to ownership are passed on to
the lessee. The lessor only remains the legal owner of the asset.
3. Therefore, the lessee bears the risk of obsolence.
4. The lessor is interested in his rentals and not in the asset. He
must get his principal back alongwith interest. Therefore the lease
is non cancellable by either party.
5. The lease period usually coincides with the economic life of the
asset and may be broken into primary and secondary period.
6. The lessor enters into the transaction only as a financier. He
does not bear the costs of repairs, maintenance or operation.
7. The lessor is typically a financial institution and cannot render
specialized service in connection with the asset.
8. The lease is usually full-pay-out, that is, the single lease repays
the cost of the asset together with the interest.
6.     Finally, their Lordships expressed their opinion at Page-4 in
Para-10 order as under :
"10. In our opinion, financial lease is a transaction current in the
commercial world, the primary purpose whereof is the financing of
the purchase by the financier. The purchase of assets or
equipments or machinery is by the borrower. For all practical
purposes, the borrower who chooses the property to be purchased
takes delivery enjoys the use of occupation of the property, bears
the wear and tear, maintains and operates the machinery/
equipment, undertakes indemnity and agrees to bear the risk of
loss of damage, if any. He is the one who gets the property insured.
He remains liable for payment of taxes and other charges and
indemnity. He cannot recover from the lessor, any of the
abovementioned expenses. The period of lease extends over and
covers the entire life of the property for which it may remain useful
divided either into one term or divided into two terms with clause
for renewal. In either case the lease is non-cancellable. " 7.
Perusal of the above observations clearly reveals that in case of
financial lease, it is the lessee who becomes the owner of the
property. In view of this judgement, in case of finance lease, it is
that the transaction is like a loan transaction where the lessor has
only financed the asset and earns interest by way of lease rentals.
                              10                    I.T.A.No. 36 /Ahd/2004
                                                      C.O. No.48/Ahd/2004




8. It would be seen that in the instant case the assessee is a finance
company and all the observations of the Supreme Court in the case
of Asea Brown Browery (supra) are also applicable to the lease
entered into by this company.
1. The assets on which lease agreement are entered into are not
selected by the assessee company, (page 98 of the paper book
shows in para 2 that the asset has been identified as per the
specifications of the lessee. This has further been clarified by
clause 5.9 of the sample agreement where it has clearly been
mentioned that the lessee has made the selection of machineries /
equipments - paper book page 101) but are selected by the lessee
companies.
2. The assessee company does not continue with the ownership of
the asset after the period of lease but the same are transferred to
the lessee at the end of lease period.
3. The lessee bears the risk of obsolence.
4. Lease is not cancelable as lessor is interested in lease rentals
and not in the asset.
5. It is noted that the lease period is conciding with the economic
life of asset as given in paper book page no. 110 clause 18.3 which
provides a fixed term.
6. (a) Repairs and maintenance are the sole responsibility of the
lessee as given in
clause (9) (paper book page no. 103).
(b) Insurance policy is to be taken out by the lessor but the
premium are to be paid by the lessee as given in clause (11) (page
104 of paper book).
In view of the above it is clear that the appellant was only
interested in the lease rentals and the whole agreement was
designed as a finance agreement. This contention is further
supported by the submission of the assessee itself made by its letter
dated 06.12.2006. This letter quoted in the order of the special
bench of the ITAT dated 19/09/2008 at page no. 28 in para 39
stated as under:
"We refer to the hearing in our cases and are submitting herewith
following papers.
1. Note on Finance and operational lease-Anmnexure-1 2
Memorandum of Articles Annexure-2
3. Three agreement of Hire Purchase transaction- Annexure-3
4. One agreement of Lease transaction-Annexure-3 5.One
agreement of lease transaction-Annexure-4
                             11                    I.T.A.No. 36 /Ahd/2004
                                                     C.O. No.48/Ahd/2004




We hereby confirm that Bad debt has been written off in the
accounts during the financial year 2000-01, and accordingly
accounts have been prepared and finalized.
"We further confirm that company mainly involves in finance lease
and not operating lease as stated in the submission before CIT(A).
This is duly stated in the attached note on leasing transactions of
the company"
9. The note appended to this letter as Annexure 1 also says so. It
reads as under-
/.    Note on classification of leases by Guiarat Gas Financial
Services Limited.
Accounting Standard 19(leases) defines the finance and operating
leases. The standard came in effect from 1/4/2001. Gujarat as
Financial Services(GFSL/Company) has classified its leased assets
as per definitions given under AS-19.
ii. Relevant abstracts from AS-19 is reproduced below:-
"The classification of leases adopted in this statement is based on
the extent to which risks and rewards incident to ownership of a
leased asset lie with the lessor or the lessee. Risks include the
possibilities of losses from idle capacity or technological
obsolescence and of variations in return due to changing economic
condition. Rewards may be presented by the expectation of
profitable operation over the economic life of the asset and of gain
from appreciation in value or realization of residual value. "
At the inception of the lease the present value of the minimum lease
payments amounts to at least substantially all of the fair value of
the leased asset
In accordance with the provisions of Accounting Standard 19 on
leases issued by the Institute of Chartered Accountants of India all
transaction entered by the assessee are classified as Finance
leases for this year and not operating lease, this is because
substantially all the risks' are borne by lessee, and also as the
same assets is not offered to various parties from time to time as
done in operating lease.
Prior to Accounting Standard 19, the company followed the
recommendations of the Institute of Chartered Accountant of India
contained in the Guidance not on accounting for leases "
Looking at the aforesaid contention the 1TAT Special Bench
observed as under on Page 30 of the said decision:
                             12                    I.T.A.No. 36 /Ahd/2004
                                                     C.O. No.48/Ahd/2004




"When the assessee itself has stated and claimed that it was a
finance lease and not operating lease what more facts are required
to entain the ground,
42. In these circumstances there is no merit in assessee's claim that
it is not financial company to which the provisions of Interest Tax
Act would apply. It would be residuary financial company
cumulatively engaged almost exclusively in one or more businesses
enumerated in section 2(5B) of the Act."
10. The above finding that all the lease agreements entered into by
the appellant company were finance leases is a finding of fact by
the Tribunal. It is a settled law that Tribunal is the highest fact
finding authority and its decision on facts cannot be tampered with
by the courts unless it is proved that the findings of the facts are
perverse. In the instant case, the special bench of the IT AT has
given a finding of fact that the lease agreements entered into are
finance leases. This being a finding of fact and not being perverse
is settled and thus it becomes clear that the lease agreements
entered into by the appellant company are finance
11. The appellant company before the CIT(A) during income tax
proceedings vide its letter dated 06.02.2006 (quoted above) had
stated that it was a finance company and all the leases entered into
are finance leases. The company did a turn around and filed a
completely opposite statement during interest tax proceedings
before the CIT(A). In fact, vide its letter dated 09.01.2008, photo
copy of which is enclosed at page 42 to 45 of the paper book in
paragraph 6 has stated in respect of lease as under: -
"Lease:
The main activities of the company is leasing and the company is
granting various machineries to parties and equipments relating to
distribution of gas by them on lease. The lease transactions
entered into by the company are mainly in the nature of operating
lease ".
It is clear that the company has taken different stands before the
CIT(A) in Income tax proceedings and during the Interest tax
proceedings only to obtain favourable decisions.
12. Whether the leases are operating lease or a finance lease is a
question of fact. It is a settled law that one cannot probate and
reprobate at the same time. Reliance in this regard is placed on the
following decisions which are quoted on page No. 230 of paper
book.
1. Lalsingh Estate Private Limited Vs CIT - 216 ITR 644 (Gauhati)
                              13                    I.T.A.No. 36 /Ahd/2004
                                                      C.O. No.48/Ahd/2004




2.CGT Vs. S. Lakshmana Sarma - 220 ITR 568 (Kerala)
3.CGT Vs. Surendra Paul - 256 ITR 173 (Calcutta)
4.N. Mangathayaramma And Others Vs. ITO - 255 ITR 127 (A.P.)
5.Reliance Industries Ltd. and another Vs. Union 258 ITR 143
(Delhi)
6.V. P. Talati Vs. ITO - 262 ITR 135 (Karnataka)
7.K. P. Gupta (HUF) Vs. CWT 234 ITR 456 (M.P.) S.Diwan
Enterprises Vs. CIT - 246 ITR 571 (Delhi)
13. The claim of the assessee that it may take alternative plea to
support its stands is not correct. It is settled law that alternative
plea cannot be on facts. Reliance in this regard is placed on the
following decisions which are quoted on page nos. 280 to 292 of
the paper book.
1. Bhaiyalal shyam Behari Vs. CIT - 276 ITR 38 (Allahabad)
2.Bimal Kumar Damani Vs. CIT - 261 ITR 635 (Calcutta)
3.CIT Vs. Kulwant Kaur and Other - 121 ITR 914 (Delhi)
4.R. Dalmia (Deed.) Vs. CIT - 255 ITR 401 (Delhi)
5.CIT Vs. La-Medica - 250 ITR 575 (Delhi)
14. As far as the hire purchase agreement is concerned it would be
seen that even the hire purchase agreement entered into by the
company are also financial transaction. The Hon'ble Supreme
Court in the case of Sundaram Finance Ltd. AIR 1966 SC 178 has
held that finance obtained through hire purchase transactions was
in fact a loan of money secured by right of seizure of goods.
15. The Circular No. 760 issued by the CBDT shown on page
no. 138 & 139 of paper
book clearly distinguishes hire purchase agreement into two
categories - hire purchase agreement which are, in substance, in
the nature of hire purchase, the receipts of hire charges would not
be in the nature of interest hence not subject to interest tax. On the
other hand, if the transactions are in substance in the nature of
financing transaction, the hire charges should be treated as
interest subject to Interest Tax. For determining the nature of
transaction the circular has given certain guidelines in line with
the decision of the Supreme Court. It would be seen that the hire
purchase agreement by the appellant company is clearly in the
nature of financial agreement. The sample hire purchase
agreement as given on page No. 128 to 137 of the paper book
clearly brings out that the appellant is into a financial agreement.
16. In view of the above, it is clear that both the transactions that
of leasing and that of hire purchase entered into by the appellant is
                             14                      I.T.A.No. 36 /Ahd/2004
                                                       C.O. No.48/Ahd/2004







in the nature of financial transactions. As per the decision of the
ITAT 'F' Special Bench Delhi in the case of Maruti Countrywide
Auto Financial Services Vs. ITO reported in (2009) 120 TTJ (Del)
(BB) 760 (2009) 29 SOT 151. The ITAT Special Bench has over
ruled the decision in the case of Bank of India V CIT 108 TTJ
(Mum) 720 by ITAT Mumbai to hold that interest tax Act was
applicable on lease transaction. In the case of Maruti Countrywide
Auto Financial Services Vs. ITO (supra) it was held as under:
"19. It is clear from the above observations of the Special Bench
that in a case where there is no dispute to the nature of
transactions which are considered to be financial transactions in
place of operational lease, the income earned by the assessee can
be brought to tax as "interest" under s. 2(7) of Interest-tax Act and
it is only the substance of the transaction which is to be considered
and not the nomenclature given to it. We have no reason to differ
from the aforementioned findings of the Special Bench in the case
of Gujarat Gas Financial Services Ltd, (supra). Here, in the
present case also, the transact/on of the assessee are already held
to be the transactions in the nature of finance/loan transaction
and, such findings have attained finality as mentioned in the
question referred to this Special Bench." (Tage No. 29 of the paper
book.).
Further, on comparison it is noted that in the case of Maruti
Country Wide Auto Financial Services Ltd. the breakup of the
income and deployment of asset is a mirror image of the appellant
company i.e. Gujarat Gas Financial Services Ltd.
Maruti Countrywide Auto Financial Services Ltd.

       Income break-up

       Income from lease               13,94,90,345            53%

       Income   from       hire        6,75,23,023             26%
       purchase

       Income           from           67,69,432               3%
       Government securities

       Income from       inter-        1,49,39,205             6%
       corporate dt.
                            15                   I.T.A.No. 36 /Ahd/2004
                                                   C.O. No.48/Ahd/2004




      Income     from     bill     1,48,74,208             6%
      discounting

      Income from bank term        32,49,418               1%
      deposit


      Income     from     late     41,94,670               2%
      payment

      Income     from   other      3,66,184                0%
      interest

      Investment income            23,34,203               1%

      Other income                 61,03,106               2%

      Total                        25,98,43,794            100%

Gujarat Gas Financial Services Ltd.
      Particulars                 1998-99                  %
                                  Rupees                   of
                                                           income

      Schedule- 14 & 15
      Income       From
      Operations & Other
      Income:

      Lease                      139,490,345               54%



      Hire Purchase              67,523,023                26%



      Bill Discount              14,874,208                6%
                               16                 I.T.A.No. 36 /Ahd/2004
                                                    C.O. No.48/Ahd/2004




      Interest on      govt.        6,769,432               3%
      securities



      Intercorporate                14,939,205              6%
      deposit



      Interest on term              3,249,418               1%
      deposit with Banks



      Profit on sale of             2,138,374               1%
      investment



      Others                        4,560,854               2%



      Dividend                      195,829                 0%



      Other Income                  6,103,106               2%



      Total                         259,843,794             100%


17. Thus it would be seen that the incoenis in the case of Maruti
Countrywide Auto Financial Services Ltd. and the appellant are
                               17                     I.T.A.No. 36 /Ahd/2004
                                                        C.O. No.48/Ahd/2004




identical hence the decision of the Special Bench of the IT AT
Delhi in that case would squarely be applicable on the linstant
case.
18. Further it would be seen that the appellant is a finance
company which is apparent from a plain reading of the section 45
of the RBI Act relating to Non Banking Finance Companies. The
relevant provisions of the RBI Act relating to non banking finance
companies are enclosed at paper book pages 65 to 81. On page 66
a financial institutions has been defined.
Thus it would be seen that any company entering into hire
purchase agreement is clearly covered as a financial institutions
by the sub clause section 45 I (c)(iii) of the RBI
Act.
The leasing activities of the appellant company also clearly shows
that it is also a financial institutions sub clause (i) of clause (c) of
section 45 I of the RBI Act. In the instant case as the appellant
company is only entering into financial leasing and not operating
leasing, thus the appellant company is only financing the money
required to the lessee company and is earning interest on the
principal amount so deployed by way of financing.
19. It is also seen that from the annual report of the appellant that
the appellant is clearly a Non Banking Finance Company because
it has taken RBI permission for the same. Back side of page 47 of
the paper book may kindly be seen in this regard. Wherein it has
clearly been mentioned in the annual report as under:
" RBI registration
It is heartening to note that your company -was successful in
obtaining registration from
Reserve Bank of India alongwith the classification as a Lease &
Hire Purchase company.
20. The activities of the company are mentioned in the director's
report which is reproduced hereunder:
"Consumer Finance
The company made disbursements to the tune ofRs. 2719 lacs
under Us consumer finance segment to 13981 customers. Out of
this, Rs. 939 lacs was disbursed to 11487 customers for domestic
and commercial natural gas connections, while Rs. 1780 lacs was
disbursed to 2494 customers under Home Appliances and Vehicle
finance schemes.
Corporate Finance
                             18                    I.T.A.No. 36 /Ahd/2004
                                                     C.O. No.48/Ahd/2004




The company has disbursed Rs. 964.40 lacs to 61 corporate
customers in medium and long term finance segment. The
Resource & Planning Management Cell has achieved a
disbursement of Rs. 6040 lacs during 1998-99. "
21. The activities of the appellant company have been presented in
the paper book filed by the appellant which is enclosed in the
departmental paper book in page no. 293 to 316. It would be seen
on page no. 300 in the paper book that it has been mentioned the
activities of the company has been
"Registered with non-deposit taking NBFC.
Primarily engaged in providing financial assistance to domestic
and industrial customers ofGGCLfor availing gas connection by
way of lease / HP.
Provides consumer finance for purchse of two wheelers and four
wheelers.
Earlier involved in bill discounting and ICD lending, which it
has now been discountinued."
22. The appellant is clearly a financial company within the
meaning of section 5B of the Interest Tax Act, 1974 because its
principle business is providing finance by way of providing
financial lease. As would be evident some the facts that the lease
income of the appellant company are 54 % of its total income.
Further, it would be seen that in the case of Maruti Country wide
auto finance (supra) the composition of income of the appellant
company is identical to that of Maruti Countrywide Auto Finance
Services Ltd. In that case it has been decided that Interest Tax Act
was applicable on the lease income earned by the assessee.
In the case of CIT Vs. Motor & General Finance Ltd. reported in
327 ITR 530 (Del.) which is enclosed at pages 31 to 41 of the
paper book. It has been held by Delhi High Court that Interest Tax
Act is clearly applicable on interest portion of the lease rental in
case of finance leases. In view of the above Interest Tax Act would
also apply to the appellant company as it is a financial company.
23. Further in the case of Jindal Lease Finance Ltd. Vs. ACIT
reported in (2005) 94 TTJ (Del) 452 dated 6/1/2005 it has been
held that Interest Tax Act is applicable on financing done through
hire purchase agreement.
In view of the above it is clear that Interest Tax Act is clearly
applicable to the income earned by way of interest by the appellant
company.
Submitted for your kind consideration.
                                    19                    I.T.A.No. 36 /Ahd/2004
                                                            C.O. No.48/Ahd/2004




                                                                     Sd./-
                                                    (RAVINDRA KUMAR)
                                         Commissioner of Income Tax (DR),
                                                   (ITAT)-I, Ahmedabad."

8.    He further submitted that on page 42-45 of the departmental paper
book is a copy of letter dated 09.01.2003 filed by the assessee before Ld.
CIT(A) in the course of income tax proceedings.          In particular, our
attention was drawn to page 43 of the paper book where it is stated by the
assessee that the lease transaction entered into by the assessee company
are mainly in the nature of operating lease.        He submitted that the
assessee is taking contradictory stands. As per letter dated 09.01.2003
filed before Ld. CIT(A) in the course of income tax proceedings, the
assessee claimed that the assessee is engaged in operating lease activities
whereas it is noted by the Special bench of the Tribunal in assessee's own
case on page 28 that as per letter dated 06.12.2006, it was stated by the
assessee that assessee's main activity is granting finance lease. At this
juncture, a query was raised by the bench as to whether any evidence or
details are available on record to decide this aspect of matter as to
whether activity of the assessee company is in the nature of finance lese
or operating lese. It was pointed out by the bench that as per the guidance
note issued by Institute of Chartered Accountants of India (ICAI), it has
been stated that in case there is recovery of capital and return on the fair
value of the asset during the lease term, the lease is to be classified as
finance lease. The Bench wanted to know as to how much was the lease
rent for the entire period of the lease and whether the same was sufficient
to recover the principal portion of lease finance along with return of fair
value of the asset. But none of the sides could produce any evidence or
detail in this regard. However, it was submitted by the Ld. D.R. that on
                                    20                    I.T.A.No. 36 /Ahd/2004
                                                            C.O. No.48/Ahd/2004




pages 96-130 of the departmental paper book, is a copy of lease
agreement and in particular our attention was drawn to page 114 of the
paper book as per which the value of the machine leased is stated to be
Rs.27.50 lacs and Rs.5,56,750/- totaling Rs.33,06,750/- and on page 115
of the paper book is the detail of lease rent to be received in the lease
period of 7 years which is specified at Rs.29,36,424/-. He further drew
our attention to page 119 of the paper book where the assessee has
worked out internal rate of return i.e. IRR from lease and in respect of
these two assets of Rs.33,06,750/-, IRR has been worked out @ 18.76%.
He submitted that both these details are conflicting and confusing because
if the total lease rent is only Rs.29,36,758 then it cannot be said that
during the lease period, the assessee is able to recover the principal
amount along with normal return of investment but if the IRR from lease
finance is worked out @ 18.76% then it has to be accepted that assessee
is able to do so. He further submitted that on page 119 of the paper book
is the value of asset given but it is not clear as to whether the entire
amount was financed by the assessee or only part thereof was financed
and whether any security deposit was taken by the assessee from the
lessee and in the absence of all these facts, it is not possible to work out
as to whether it is a finance lease or operating lease. Both the sides
placed reliance on various judgements but before deciding this factual
aspect, the judgements' applicability cannot be examined. We feel it
proper to first analyze the facts to examine as to whether the assessee is
undertaking finance lease or operative lease but for doing so, complete
facts are not available on record. We can analyze the applicability of
various judgements cited by both the sides only after that.
                                     21                    I.T.A.No. 36 /Ahd/2004
                                                             C.O. No.48/Ahd/2004




9.       In the light of the facts noted by us in above paragraphs, we find
that sufficient material is not available on record to give the finding as to
whether the assessee is engaged in granting operating lease or finance
lease.     The assessee has also taken contradictory stands in interest tax
proceedings and income tax proceedings. In the interest tax proceedings,
the assessee is claiming that it is engaged in operating lease but in income
tax proceedings, the stand of the assessee is this that the assessee is
engaged in granting financial lease. There is no clear cut finding of the
authorities below also in this regard. Under this factual position, we feel
it proper that the matter should go back to the file of the A.O. for a clear
cut decision on this aspect of matter as to whether the assessee is engaged
in granting operating lease or finance lease. Then only, one can decide
the applicability of various judgements cited by both the sides.
Therefore, we set aside the order of Ld. CIT(A) and restore the entire
matter back to the file of the A.O. for a fresh decision. The assessee has
to bring complete details and evidence on record to enable the A.O. to
decide as to whether the assessee is engaged in granting operating lease
or finance lease. If it is found that the nature of lease granted by the
assessee is different in one case and different in another case then the
total amount of operating lease and similarly total amount of finance
lease has to be worked out in the light of details and evidences to be
brought on record by the assessee and, thereafter, it has to be seen as to
whether the principal activity of the assessee is financial leasing or
operating lease. Here, we want to make it clear that finance lease activity
should be considered as financial activity and operating lease activity
should be considered as leasing activity. Other activities of the assessee
of granting loan and advances etc., hire purchase and other activities
                                      22                       I.T.A.No. 36 /Ahd/2004
                                                                 C.O. No.48/Ahd/2004




should also be grouped accordingly in these two categories i.e. finance
lease or operating lease and thereafter, it has to be decided as to what is
the principal activity of the assessee and then only, this aspect should be
decided as to whether the assessee is a credit institution or not. The
judgements cited by both the sides should be considered at this stage to
decide the liability of the assessee in respect of interest tax and, therefore,
at the present stage, we do not feel it necessary to analyze and discuss
these judgements cited by both the sides.
10.   In view of above decision, the question referred to us is left
unanswered because in the absence of necessary and relevant facts as
discussed above, it is not possible to answer this question.
11.   In the result, cross appeals of the assessee and the revenue are
allowed for statistical purposes.
12.   Order pronounced in the open court on the date mentioned
hereinabove.




  Sd/-                      Sd/-                        Sd/-
(G. C. GUPTA)    (D. K. TYAGI)    (A. K. GARODIA)
VICE PRESIDENT JUDICIAL MEMBER ACCOUNTANT MEMBER
Sp

Copy of the Order forwarded to:
  1.     The applicant
  2.     The Respondent
  3.     The CIT Concerned
  4.     The Ld. CIT (Appeals)
  5.     The DR, Ahmedabad                            By order
  6.     The Guard File
                                                      AR,ITAT,Ahmedabad

 
 
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