Tca/1377/2009 Of M/S Dadha Pharma P Ltd v. The Income Tax Officer (Osd)

IN THE HIGH COURT OF JUDICATURE AT MADRASReserved onPronounced on 10.01.202227.01.2022CORAM THE HONOURABLE MR.JUSTICE R.MAHADEVANandTHE HONOURABLE MR.JUSTICE MOHAMMED SHAFFIQ M/s. Dadha Pharma (P) Ltd.,Rep. by its Managing Director,Sri Mohan Chand Dadha. ... Appellant in all appeals 1.The Income Tax Officer, Company Circle 1(4). Chennai-600 034. 2.The Income-tax Appellate Tribunal, Chennai "A" Bench, Chennai.... Respondents in all appeals T.C.A.No.1377 of 2009: Appeal under Section 260A of the IncomeTax Act, 1961 against the order dated 03.04.2009 made inInt.T.A.No.0013/Mad/2008 on the file of the Income Tax AppellateTribunal, "A" Bench for the assessment year 1997-98. T.C.A.No.1378 of 2009: Appeal under Section 260A of the IncomeTax Act, 1961 against the order dated 03.04.2009 made inInt.T.A.No.0014/Mad/2008 on the file of the Income Tax AppellateTribunal, "A" Bench for the assessment year 1998-99. T.C.A.No.1379 of 2009: Appeal under Section 260A of the IncomeTax Act, 1961 against the order dated 03.04.2009 made inInt.T.A.No.0015/Mad/2008 on the file of the Income Tax AppellateTribunal, "A" Bench for the assessment year 1999-2000. T.C.A.No.1380 of 2009: Appeal under Section 260A of the IncomeTax Act, 1961 against the order dated 03.04.2009 made inInt.T.A.No.0016/Mad/2008 on the file of the Income Tax AppellateTribunal, "A" Bench for the assessment year 2000-01.( In all appeals) Prayer:- Against the order dated 13/03/2008 of the The Commissionerof Income Tax (Appeals) VIII, Chennai in ITA Nos.151 to154/07/08 Pertaining to Assessment years 1997-98, 1988-99, 1999-2000, 2000-2001 against the order of the In The Income TaxOfficer (OSD), Company Circle 1(4). Chennai dated 11/12/2007 inPA/GIR NO.AAA CD 1265F. For Appellant: Mr.A.Ramesh Kumar For Respondent : Mr.T.Ravikumar, standing counsel COMMON JUDGMENT MOHAMMED SHAFFIQ, J. We have heard the learned counsel for the appellant and thelearned standing counsel appearing for the respondents and alsoperused the materials available on record. 2.These appeals are filed by the appellant/assesseequestioning the legality and validity of the order dated03.04.2009 passed by the Income Tax Appellate Tribunal under theInterest Tax Act, 1974. 3.The appellant was incorporated under the Companies Act,1956 and engaged in the business of distribution of pharmaproducts, besides finance, investments, etc. On 01.08.1996 theytransferred the pharma distribution business to a new companycalled M/s Dadha Pharma Marketing Pvt. Ltd., while retaining thebusiness of finance and investments. During the assessment years1997-98, 1998-99, 1999-2000 and 2000-2001, the appellant hadmade loans and advances and credited interest in the profit andloss account. But, they had not filed returns under the InterestTax Act, 1974. 4.According to the Assessing Officer, since the appellantcarried on the business of finance and investment as a financecompany as defined in section 2 (5B) of the Interest Tax Act andthe interest earned by it was within the purview of section 2(7)of the Act, notices under Section 148 read with section 10 ofthe Interest Tax Act, 1974 came to be issued on the premise thatchargeable interest had escaped assessment. In response to thesame, the appellant filed its return disclosing 'nil' chargeableinterest, stating that its principal business is not lending andfinancing and thus they do not come within the purview of theInterest Tax Act, 1974. Being dissatisfied with the same, theassessing authority rejected the plea of the appellant andpassed the assessment orders for the assessment years in question, the details of which are tabulated below: question, the details of which are tabulated below: 5.Aggrieved by the orders of the assessing authority, theappellant carried the matter by way of appeals and furtherappeals before the Appellate Authorities viz., Commissioner ofIncome Tax (Appeals)-VIII, Chennai and the Income Tax AppellateTribunal respectively. The appellant reiterated its stand asraised before the assessing authority that its principalbusiness is not lending and financing and thus, the appellantcompany does not come within the purview of the Interest TaxAct, 1974, before the Appellate Authorities. However, it washeld by both the Appellate Authorities that the income earned onaccount of the interest was liable to tax under the Interest TaxAct, 1974. Taking note of the object of the company as set outin the Memorandum of Association coupled with the fact thatinterest was offered as business income in the return of incomefiled by the appellant for the assessment years in question; andthe nature of business was declared as finance and investmentsin the audit report, the Appellate Authorities viz., the firstappellate authority and the Tribunal confirmed the orders of theAssessing Officer and dismissed the appeals filed by theappellant. 6.Feeling aggrieved, the appellant / assessee has comeforward with these tax case appeals, raising the followingsubstantial questions of law:- 1.Whether on the facts and circumstances of the case, theAppellate Tribunal was right in concluding that thereopening of assessment beyond the period of four years isvalid in law as per section 10 of the Interest Tax Act,1974? 2.Whether on the facts and circumstances of the case, theAppellate Tribunal was right in law in concluding that theinterest income as chargeable interest under section 2(7)read with section 2(5B) V-A of the Interest Tax Act, 1974without considering the Memorandum of the AppellantCompany, which does not contain the finance business?3.Whether on the facts and circumstances of the case, theAppellate Tribunal was right in law in concluding that theadvances given were not in the nature of finance to attractthe provisions of clause (ii) or (va) to section 2 (5B) ofAppellate Tribunal was right in law in concluding that theinterest income as chargeable interest under section 2(7)read with section 2(5B) V-A of the Interest Tax Act, 1974without considering the Memorandum of the AppellantCompany, which does not contain the finance business?3.Whether on the facts and circumstances of the case, theAppellate Tribunal was right in law in concluding that theadvances given were not in the nature of finance to attractthe provisions of clause (ii) or (va) to section 2 (5B) of the Interest Tax Act? 7.At the outset, it is pertinent to note that both theappellate authorities have treated the appellant as constituting“any other financial company”in terms of Section 2(5A)(iv) ofthe Interest Tax Act, 1974, thereby qualifying as a “taxableperson” for the purpose of attracting the charge under theInterest Tax Act, 1974, though the assessments were made by theassessing authority, treating the appellant as a residuary non-banking finance company falling under section 2(5B) (va) of theInterest Tax Act, 1974. 8.To answer the above questions, it may be relevant torefer to the following provisions under the Interest Tax Act,1974, which read as under:“2.Definitions.—In this Act, unless the contextotherwise requires,*** (5) ‘chargeable interest’ means the total amountof interest referred to in Section 5, computed in themanner laid down in Section 6; (5-A) ‘credit institution’ means,— (i) a banking company to which the BankingRegulation Act, 1949 (10 of 1949), applies (includingany bank or banking institution referred to in Section51 of that Act); 8.To answer the above questions, it may be relevant torefer to the following provisions under the Interest Tax Act,1974, which read as under:“2.Definitions.—In this Act, unless the contextotherwise requires,*** (5) ‘chargeable interest’ means the total amountof interest referred to in Section 5, computed in themanner laid down in Section 6; (5-A) ‘credit institution’ means,— (i) a banking company to which the BankingRegulation Act, 1949 (10 of 1949), applies (includingany bank or banking institution referred to in Section51 of that Act); (ii) a public financial institution as defined inSection 4-A of the Companies Act, 1956 (1 of 1956);(iii) a State Financial Corporation establishedunder Section 3 or Section 3-A or an institutionnotified under Section 46 of the State FinancialCorporations Act, 1951 (63 of 1951), and (iv) any other financial company;(5-B) ‘financial company’ means a company, otherthan a company referred to in sub-clause (i), (ii) or(iii) of clause (5-A), being—(i) ....(ii) ....(iii) ....(iv) a loan company, that is to say, a companynot being a company referred to in sub-clauses (i) to(iii) which carries on, as its principal business, thebusiness of providing finance, whether by making loansor advances or otherwise;(v) .... https://hcservices.ecourts.gov.in/hcservices/ (v-a) a residuary non-banking company other thana financial company referred to in sub-clauses (i),(ii), (iii), (iv) or (v), that is to say, a companywhich receives any deposit under any scheme orarrangement, by whatever name called, in one lump sumor in instalments by way of contributions orsubscriptions or by sale of units or certificates orother instruments or in any other manner; or (vi) a miscellaneous finance company, that is tosay, a company which carries on exclusively, or almostexclusively, two or more classes of business referredto in the preceding sub-clauses;* ** (7) ‘interest’ means interest on loans andadvances made in India and includes— (a) commitment charges on unutilised portion ofany credit sanctioned for being availed of in India;and (b) discount on promissory notes and bills ofexchange drawn or made in India,but does not include— (i) interest referred to in sub-section (1-B) ofSection 42 of the Reserve Bank of India Act, 1934 (2of 1934); (ii) discount on treasury bills; 4.Charge of tax.—(1) Subject to the provisions ofthis Act, there shall be charged on every scheduledbank for every assessment year commencing on or afterthe 1st day of April, 1975, a tax (in this Act,referred to as interest tax) in respect of itschargeable interest of the previous year at the rateof seven per cent of such chargeable interest: Provided that the rate at which interest taxshall be charged in respect of any chargeable interestaccruing or arising after the 31st day of March, 1983shall be three-and-a-half per cent of such chargeableinterest. (2) Notwithstanding anything contained in sub-section (1) but subject to the other provisions ofthis Act, there shall be charged on every creditinstitution for every assessment year commencing onand from the 1st day of April, 1992, interest tax inrespect of its chargeable interest of the previousyear at the rate of three per cent of such chargeableinterest: Provided that the rate at which interest taxshall be charged in respect of any chargeable interest accruing or arising after the 31st day of March, 1997shall be two per cent of such chargeable interest.(3) Notwithstanding anything contained in sub-sections (1) and (2), no interest tax shall be chargedin respect of any chargeable interest accruing orarising after the 31st day of March, 2000. (2) Notwithstanding anything contained in sub-section (1) but subject to the other provisions ofthis Act, there shall be charged on every creditinstitution for every assessment year commencing onand from the 1st day of April, 1992, interest tax inrespect of its chargeable interest of the previousyear at the rate of three per cent of such chargeableinterest: Provided that the rate at which interest taxshall be charged in respect of any chargeable interest accruing or arising after the 31st day of March, 1997shall be two per cent of such chargeable interest.(3) Notwithstanding anything contained in sub-sections (1) and (2), no interest tax shall be chargedin respect of any chargeable interest accruing orarising after the 31st day of March, 2000. 5.Scope of chargeable interest.—Subject to theprovisions of this Act, the chargeable interest of anyprevious year of a credit institution shall be thetotal amount of interest (other than interest on loansand advances made to other credit institutions or toany cooperative society engaged in carrying on thebusiness of banking) accruing or arising to the creditinstitution in that previous year: Provided that any interest in relation tocategories of bad or doubtful debts referred to inSection 43-D of the Income Tax Act shall be deemed toaccrue or arise to the credit institution in theprevious year in which it is credited by the creditinstitution to its profit and loss account for thatyear or, as the case may be, in which it is actuallyreceived by the credit institution, whichever isearlier.” A cumulative reading of the above provisions would make it clearthat the charge under the Interest Tax Act, 1974 would getattracted on every credit institution for every assessment yearcommencing from 01.04.1992 in respect of “Chargeable interest”ofthe previous year. 9.Such being the position of law, we are now inclined tolook into the findings of the Authorities below, for betterappreciation of the issue at hand and the same are reproducedhereinbelow: Assessing authority “... it has come to light that the assessee companyis not a Finance Company as defined in section 2(5B) ofthe Interest Tax Act, 1974. As evidenced by its MOA, itsprincipal business is not lending and finance business.Hence, the assessee company had claimed that although itcarried on the activity of lending and investment duringthe FY 1998-99, it did not carry on the actual financingbusiness warranting the application of Interest Tax Act.... The advances in respect of last two parties asstated above pertained to buy back of shares of thecompany from them. But, on perusal of the details filedand clarifications given, it is ascertained that althoughthe assessee is not attracted by the provisions of clause(ii) of sub-section (5B) of sec. 2 of Interest Tax Act, still it comes under the provisions of (va) of sub section(5B) of sec. 2 of Interest Tax Act, a residuary nonbanking finance company. As the income earned on accountof interest is offered as business income in the return ofincome filed by the assessee ..., the interest income isexigible. Hence, the entire interest income ..... istreated as chargeable interest as defined u/s 2(7) of theInterest Tax Act and assessed accordingly u/s 8(2) of theInterest Tax Act.” First Appellate Authority: “7.... After the transfer of its Pharma Distributionbusiness, the appellant was engaged in the business ofFinance and Investment as evident from the returns ofincome and audit report filed along with the returns ofincome. The appellant company did not have any substantialincome from any other activities except the interestreceived on the advances made by the company. In thecircumstances, the AO is justified in treating theappellant as any other Finance Company and brought to taxthe interest credited in the accounts. I therefore,confirm the action of the AO.” Tribunal: First Appellate Authority: “7.... After the transfer of its Pharma Distributionbusiness, the appellant was engaged in the business ofFinance and Investment as evident from the returns ofincome and audit report filed along with the returns ofincome. The appellant company did not have any substantialincome from any other activities except the interestreceived on the advances made by the company. In thecircumstances, the AO is justified in treating theappellant as any other Finance Company and brought to taxthe interest credited in the accounts. I therefore,confirm the action of the AO.” Tribunal: “....On going through the above noted conclusion ofld. CIT(A), we find that the basis and reasoning as givenby the Id. CIT(A) in this regard are sound and convincingwho is found to have considered each and every aspect ofmatter in detail. Since neither any infirmity or flaw hasbeen pointed nor noticed by this Bench, which couldjustify any interference in the conclusion as drawn by theId. CIT(A) therefore, while concurring with the finding ofthe Id. CIT(A), we upheld his action and dismiss thisground of appeal of the assessee for all the years.” 10.It appears from the aforesaid findings of theAuthorities below that the assessing authority has proceededwith the case of the appellant on the premise that the appellantwould fall within the meaning of “residuary non-bankingfinancial company”. Whereas, the first appellate authorityconfirmed the order of the assessing authority, treating theappellant as “any other financial company”. The said order ofthe first appellate authority was affirmed by the Tribunal, bymerely extracting the findings of the first appellate authority.Such course adopted by the Appellate Authorities does not appearto be correct, in the opinion of this court. 11.We find that the expression “financial company” asdefined under section 2(5B) of the Interest Tax Act, 1974, means“a company” carrying on activities as enumerated in sub-clauses https://hcservices.ecourts.gov.in/hcservices/ (iv) to (v) thereon. Both the appellate authorities have not setout the sub-clause to the definition of “financial company”which covers the appellant company. The said aspect relating toidentifying the “taxable person” is an essential criterion for the charge to get attracted. However, the appellate authoritiesfailed to mention the sub-clause to Section 2(5B) of theInterest Tax Act, 1974, under which the appellant would fall. Onthis score alone, we are inclined to set aside the order of theTribunal and remand the matter to the Tribunal for freshconsideration. 12.At this juncture, it is apt to refer to the decision ofthe supreme court in CWT v. Ellis Bridge Gymkhana (1998) 229 ITR1 : (1997) 95 Taxman 143, in which, it was held that “the ruleof construction of a charging section is that before taxing anyperson, it must be shown that he falls within the ambit of thecharging section by clear words used in the section and no onecan be taxed by implication”. 13.In the light of the discussions held above, we setaside the order impugned herein and remand the matter to theTribunal for fresh consideration. The Tribunal shall examine thefacts as regards the activity of the appellant, and set outunder which sub clause to the definition of “financial company”under section 2(5B), the appellant company would fall, so as toattract charge under the Interest Tax Act, 1974 and thereafter,pass appropriate orders. Such an exercise shall be completedwithin a period of twelve (12) weeks from the date of receipt ofa copy of this judgment. 14.All these tax case appeals of the assessee are disposedof to the extent as indicated above. No costs. Sd/- Assistant Registrar(CS IV) //True Copy// Sub Assistant Registrar smn 1. The Income Tax Officer, Company Circle 1(4). Chennai-600 034. Company Circle 1(4). Chennai-600 034. 14.All these tax case appeals of the assessee are disposedof to the extent as indicated above. No costs. Sd/- Assistant Registrar(CS IV) //True Copy// Sub Assistant Registrar smn 1. The Income Tax Officer, Company Circle 1(4). Chennai-600 034. Company Circle 1(4). Chennai-600 034. 2. The Commissioner of Income Tax (Appeals) VIII Chennai. Chennai. 3. The Income-tax Appellate Tribunal, Chennai "A" Bench, Chennai.4. The Income Tax Officer (OSD), Company Circle 1(4). Chennai-600 034.+4cc to Mr.T.Ravikumar, Advocate, S.R.No.4529 to 4532+1cc to Mr.T.Ravikumar, Advocate, S.R.No.1872+2cc to Mr.A.Ramesh Kumar, Advocate, S.R.No.4671 T.C.A. Nos.1377 to 1380 of 2009SRA(CO)CT 14/02/2022