Commissioner Of Income Tax v. Gujarat Industrial

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON MONDAY ,THE 04TH DAY OF FEBRUARY 2019 / 15TH MAGHA, 1940 ITA.No. 416 of 2009 AGAINST THE ORDER/JUDGMENT IN ITA 101/COCH/2004 ofI.T.A.TRIBUNAL,COCHIN BENCH DATED 21-04-2006 APPELLANT/APPELLANT/REVENUE: THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES)SRI.JOSE JOSEPH SC FOR INCOME TAX RESPONDENT/RESPONDENT/ASSESSEE: HARRISONS MALAYALAM FINANCIAL SERVICES LTD.,WILLINGDON ISLAND, COCHIN 682 003. BY ADVS.SRI.ANIL D. NAIRSRI.E.K.NANDAKUMAR (SR.)SRI.K.JOHN MATHAISRI.P.BENNY THOMAS THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 04.02.2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: K.VINOD CHANDRAN & ASHOK MENON, JJ. -------------------------------------------ITA No.416 of 2009------------------------------------------- Dated this the 4[th] day of February, 2019 J U D G M E N T Vinod Chandran, J. The first question arising in the appealis with respect to the liability of the assessee tointerest tax on interest on debentures. The issuestands covered in favour of the assessee andagainst the Revenue by a decision of the HonourableSupreme Court reported in (2016) 388 ITR 484 (SC) [Commissioner of Income Tax v. Gujarat Industrial Investment Corporation].The Honourable SupremeCourt found on a reading of the definition of'interest' as contained in Section 2(7) of theInterest Tax Act, 1974 (“Act” for short) that theAct would have no application to interest ondebentures. We hence answer the said question in favour of the assessee and against the Revenueupholding the order of the Income Tax AppellateTribunal. 2.The further question arising from theorder of the Tribunal is as to whether the assesseeis liable to pay interest tax on the interestreceived on a loan made to a broker. The facts aswe discern from the orders of the first appellateauthority is that the assessee had engaged a brokerto make investments in shares and securities, theassessee being a company engaged in the purchaseand sale of securities. The assessee had advancedan amount of Rs.1,30,00,000/- to the broker for thepurpose of making investments on the assessee'sbehalf in the stock market. The advance was madeon 25.10.1990. The broker made investments for thevalue of Rs.1,20,00,000/-. There was a balance ofRs.10,00,000/- remaining with the broker for which the assessee charged interest @ 18%. In thesubject assessment year, the assessee obtainedinterest of Rs.1,80,000/-, on which the levy wasmade. 3.The learned Senior Counsel, Governmentof India (Taxes) would contend that the interestliability would specifically come under clause (a)of Section 2(7) of the Act. The learned counselappearing for the assessee would, on the contrary,submit that at the time of making the advance,there was never an intention for the assessee tolevy interest. The entire advance was for thepurpose of making investments in the stock market.The retention of the balance amounts after makinginvestments with the broker, was also for thepurpose of making further investments in the stockmarket. The learned counsel would also rely on thedecision of the Madras High Court in (2011) 339 ITR ITA 416/09 391 (Mad) [Commissioner of Income Tax v. Integrated Finance Co. Ltd.]. 3.The learned Senior Counsel, Governmentof India (Taxes) would contend that the interestliability would specifically come under clause (a)of Section 2(7) of the Act. The learned counselappearing for the assessee would, on the contrary,submit that at the time of making the advance,there was never an intention for the assessee tolevy interest. The entire advance was for thepurpose of making investments in the stock market.The retention of the balance amounts after makinginvestments with the broker, was also for thepurpose of making further investments in the stockmarket. The learned counsel would also rely on thedecision of the Madras High Court in (2011) 339 ITR ITA 416/09 391 (Mad) [Commissioner of Income Tax v. Integrated Finance Co. Ltd.]. 4.Having gone through the decisioncited, we find that the assessee therein was also afinance company. However, the advance made was to amanufacturer of goods with whom the assessee hadregular trading transactions. The assessee wasinvolved in the business of hire purchase and leaseof various equipments, some of which weremanufactured by the manufacturer. The advance was inlieu of such manufacture. Hence, there is a specifictrading activity and it was hence the Division Benchof the Madras High Court held that a trading advancewould not fall within the parameters of a loan. TheTribunal also in the present case, deleted the levyunder the Act on the premise that it is a tradingadvance made by the assessee to the broker.5.We do not discern any trading betweenthe broker and the assessee. The assessee engages the broker for making investments in the stockmarket and there is only a service rendered by thebroker through whom alone the assessee could makesuch investments. There being no trading activitybetween the assessee and the broker, it cannot besaid to be a trading advance. The advance was madefor making investments and after such investmentswere made what was retained with the broker waslevied with interest by the assessee thus giving itthe character of a loan. The assessee's intentionat the time of advance is not at all relevant,since the character of the amounts retained withthe share broker underwent a change, insofar as thelevy made for interest. It is also clear that theamount remained with the broker for one year andhence the receipt of Rs.1,80,000/- as interest on aloan of Rs.10 lakhs @ 18% per annum. We henceanswer the second question in favour of the Revenue ITA 416/09 -7- and against the assessee. We partly allow theappeal leaving the parties to suffer theirrespective costs. Sd/-K.VINOD CHANDRANJUDGESd/-ASHOK MENONJUDGE APPENDIX APPELLANT'S EXHIBITS: ANNEXURE-ACOPY OF ORDER U/S. 8(2) R.W.S.10 THE INTEREST TAX ACT, 1974 DATED 28/02/2002FOR THE ASSESSMENT YEAR 1994-95. ANNEXURE-BCOPY OF ORDER DATED 18/08/2004 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE-CCOPY OF THE ORDER DATED 21/04/2006 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN IN ITA NO.101/COCH/2004. ANNEXURE-D BOARD'S INSTRUCTION NO.1923 DATED 14/03/1995. [True Copy] jg