Full Judgment Text
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.5283 OF 2004
Commissioner of Income Tax, Kanpur ...Appellant(s)
Versus
M/s. Sahara India Savings & Investment
Corporation Ltd.
...Respondent(s)
W I T H
Civil Appeals Nos.5284/2004, 5285/2004, 5286/2004 and
Civil Appeal No.4294/2006
O R D E R
In this batch of Civil Appeals, the main issue which
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arises for determination is: Whether interest” which the
assessee earned on bonds and debentures was chargeable to tax
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in view of the definition of the term interest” in Section
2(7) of the Interest Tax Act, 1974.
Respondent Company is a company registered under the
Indian Companies Act, 1956. One of the objects for which the
company was incorporated is to buy, sell, invest or otherwise
deal in securities, bonds or fixed deposits issued by any
institution, body corporate, corporation, establishment
constituted under any Central or State laws or any other
securities in which the company may be required to invest
under any law in force.
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For deciding the afore-stated issue, one needs to
examine the provisions of the Interest Tax Act, 1974 as
under:
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2.In this Act, unless the context otherwise
requires,-
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(5) “chargeable interest” means the total
amount of interest referred to in section 5, computed
in the manner laid down in section 6;”
" "
(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 that 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.”
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(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 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
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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;
(v) a mutual benefit finance company, that is
to say, a company which carries on, as its principal
business, the business of acceptance of deposits from
its members and which is declared by the Central
Government under section 620A of the Companies Act,
1956 (1 of 1956), to be a Nidhi or Mutual Benefit
Society;
(va) a residuary non-banking company other than
a financial company referred to in sub-clause (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;”
" "
(7) interest” means interest on loans and
advances made in India and includes-
(a) commitment charges on unutilised portion of
any credit sanctioned for being availed of in India;
and
(b) discount on promissory notes and bills of
exchange drawn or made in India,
but does not include-
(i) interest referred to in sub-section (1B) of
section 42 of the Reserve Bank of India Act, 1934 (2
of 1934);
(ii) discount on treasury bills;”
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Charge of tax
4.(1) Subject to the provisions of this Act, there
shall be charged on every scheduled bank for every
assessment year, commencing on or after the 1st day of
April, 1975, a tax (in this Act, referred to as
interest-tax) in respect of its chargeable interest of
the previous year at the rate of seven per cent of
such chargeable interest:
Provided that the rate at which interest-tax
shall be charged in respect of any chargeable interest
accruing or arising after the 31st day of March, 1983
shall be three and a half per cent, of such chargeable
interest.
(2) Notwithstanding anything contained in sub-
section (1) but subject to the other provisions of
this Act, there shall be charged on every credit
institution for every assessment year commencing on
and from the 1st day of April, 1992, interest-tax in
respect of its chargeable interest of the previous
year at the rate of three per cent of such chargeable
interest:
Provided that the rate at which interest-tax
shall be charged in respect of any chargeable interest
accruing or arising after the 31st day of March, 1997
shall be two per cent of such chargeable interest.
(3) Notwithstanding anything contained in sub-
sections (1) and (2), no interest-tax shall be charged
in respect of any chargeable interest accruing or
arising after the 31st day of March, 2000.”
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Scope of chargeable interest
5. Subject to the provisions of this Act, the
chargeable interest of any previous year of a credit
institution shall be the total amount of interest
(other than interest on loans and advances made to
other credit institutions or to any co-operative
society engaged in carrying on the business of
banking) accruing or arising to the credit institution
in that previous year:
Provided that any interest in relation to
categories of bad or doubtful debts referred to in
section 43D of the Income-tax Act shall be deemed to
accrue or arise to the credit institution in the
previous year in which it is credited by the credit
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institution to its profit and loss account for that
year or, as the case may be, in which it is actually
received by the credit institution, whichever is
earlier.”
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Computation of chargeable interest.
6. (1) Subject to the provisions of sub-section
(2), in computing the chargeable interest of a
previous year, there shall be allowed from the total
amount of interest (other than interest on loans and
advances made to credit institutions) accruing or
arising to the assessee in the previous year, a
deduction in respect of the amount of interest which
is established to have become a bad debt during the
previous year :
Provided that such interest has been taken into
account in computing the chargeable interest of the
assessee of an earlier previous year and the amount
has been written off as irrecoverable in the accounts
of the assessee for the previous year during which it
is established to have become a bad debt.
Explanation.- For the removal of doubts, it is hereby
declared that in computing the chargeable interest of
a previous year, no deduction, other than the
deduction specified in this sub-section shall be
allowed from the total amount of interest accruing or
arising to the assessee.
(2) In computing the chargeable interest of a previous
year, the amount of interest which accrues or arises
to the assessee before the 1st day of August, 1974, or
during the period commencing on the 1st day of March,
1978, and ending with the 30th day of June, 1980, or
during the period commencing on the 1st day of April,
1985 and ending with the 30th day of September, 1991
shall not be taken into account”
The Interest Tax Act, 1974 has been enacted with two-
fold purposes, namely, as an anti-inflationary measure and
for revenue collection. It is an Act which has been
periodically passed for economic reasons, particularly when
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inflation takes over the economy. With this introduction,
one needs to examine the provisions quoted herein-above.
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Section 2(5) defines chargeable interest” to mean
total amount of interest referred to in section 5, computed
in the manner laid down in section 6. In other words, the
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scope of chargeable interest” is defined under section 5
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whereas computation of chargeable interest” is under section
6. Section 2(7) is the heart of the matter as far as the
present case is concerned.
In accounting sense, there is a conceptual difference
between loans and advances on one hand and investments on the
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other hand. Section 2(7) defines the word interest” to mean
interest on “loans and advances including commitment charges,
discount on promissory notes and bills of exchange but not to
include interest referred to under section 42(1B) of the
Reserve Bank of India Act, 1934 as well as discount on
treasury bills”. Section 2(7), therefore, defines what is
interest in the first part and that first part confines
interest only to loans and advances, including commitment
charges, discount on promissory notes and bills of exchange.
Pausing here, it is clear that the interest tax is meant to
be levied only on interest accruing on loans and advances but
the Legislature, in its wisdom, has extended the meaning of
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the word interest” to two other items, namely, commitment
charges and discount on promissory notes and bills of
exchange. In normal accounting sense, “loans and advances”,
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as a concept, is different from commitment charges and
discounts and, keeping in mind the difference between the
three, the Legislature, in its wisdom, has specifically
included in the definition under section 2(7) commitment
charges as well as discounts. The fact remains that interest
on loans and advances will not cover under section 2(7)
interest on bonds and debentures bought by an assessee as and
by way of “investment”. Even the exclusionary part of
section 2(7) excludes only discount on treasury bills as well
as interest under section 42(1B) of the Reserve Bank of India
Act, 1934.
Reading section 2(7) as a whole, it is clear that
“interest on investments” is not taxable as interest under
section 2(7) of the said 1974 Act.
It is the case of the Department, however, which needs
to be addressed at this stage, that prior to 1.10.1991, the
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word interest” in section 2(7) was defined so as to include
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any amount chargeable to income tax under the head Interest
on securities”. It is the case of the Department that by an
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amendment w.e.f. 1.10.1991, the said item, namely, amount
chargeable to income tax under the head Interest on
securities” stood deleted and, consequently, “interest on
securities” would fall within the definition of the word
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interest” under section 2(7). According to the Department,
section 2(7) was not exhaustive and with the amendment w.e.f.
1.10.1991 when 'Interest on securities' stood excluded, it
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(interest on securities) would automatically fall within the
purview of the word 'interest' under section 2(7) of the 1974
Act. We find no merit in this argument for two reasons.
Firstly, as stated above, section 2(7), read as a whole,
focuses only on interests accruing on loans and advances,
commitment charges and discount on promissory notes and bills
of exchange. It also specifically excludes interest under
section 42(1B) of the Reserve Bank of India Act as well as
discount on treasury bills. It was very easy for the
Parliament to expressly provide for “interest on investments”
to fall under section 2(7), but that has not been done. The
reason is obvious. As stated above, one of the objects of
enacting the 1974 Act is by way of an anti-inflationary
measure. In an inflationary situation, the cost of borrowing
for the Government also increases. One of the ways by which
the cost of borrowing can be reduced is to see that companies
like the respondent herein are made to invest in bonds and
securities so that the Government is able to borrow monies at
a cheaper rate as compared to its borrowings in the market.
It is precisely for this reason that the Reserve Bank of
India, which is a Regulator and which is responsible for the
credit management of the economy and which is empowered to
issue Directions from time to time not only with the object
of regulating the credit but also to control businesses like
non-banking financial companies and residuary non-banking
companies by issuing directions under Chapter IIIB of the
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Reserve Bank of India Act, issues directions and one of such
directions which has been issued in the present case is
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called as Residuary Non-Banking Companies (Reserve Bank)
Directions, 1987. These Directions have been issued under
sections 45J and 45K of the Reserve Bank of India Act, 1934.
We quote herein-below relevant provisions of Chapter
IIIB of the Reserve Bank of India Act, 1934 which refers to
provisions relating to non-banking institutions receiving
deposits and financial institutions. The relevant provisions
are 45J, 45JA, 45K and 45Q which are as under:
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45J. Bank to regulate or prohibit issue of
prospectus or advertisement soliciting deposits of
money.-The Bank may, if it consider necessary in
the public interest so to do, by general or
special order,-
(a) regulate or prohibit the issue by any
non-banking institution of any prospectus or
advertisement soliciting deposits of money from
the public, and
(b) specify the conditions subject to which
any such prospectus or advertisement, if not
prohibited, may be issued.”
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45JA. Power of Bank to determine policy
and issue directions.- (1) If the Bank is
satisfied that, in the public interest or to
regulate the financial system of the country to
its advantage or to prevent the affairs of any
non-banking financial company being conducted in
manner detrimental to the interest of the
depositors or in a manner prejudicial to the
interest of the non-banking financial company, it
is necessary or expedient so to do, it may
determine the policy and give directions to all or
any of the non-banking financial companies
relating to income recognition, accounting
standards, making of proper provision for bad and
doubtful debts, capital adequacy based on risk
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weights for assets and credit conversion factors
for off balance-sheet items and also relating to
deployment of funds by a non-banking financial
company or a class of non-banking financial
companies or non-banking financial companies
generally, as the case may be, and such non-
banking financial companies shall be bound to
follow the policy so determined and the directions
so issued.
(2) Without prejudice to the generality of the
powers vested under sub-section (1), the Bank may
give directions to non-banking financial companies
generally or to a class of non banking financial
companies or to any non-banking financial company
in particular as to-
(a) the purpose for which advances or other
fund based or non-fund based accommodation may
not be made; and
(b) the maximum amount of advances of other
financial accommodation or investment in
shares and other securities which, having
regard to the paid-up capital, reserves and
deposits of the non-banking financial company
and other relevant considerations, may be made
by that non-banking financial company to any
person or a company or to a group of
companies.”
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45K. Power of Bank to collect information from
non-banking institutions as to deposits and to
give directions.-(1) The Bank may at any time
direct that every non-banking institution shall
furnish to the Bank, in such form, at such
intervals and within such time, such statements
information or particulars relating to or
connected with deposits received by the non-
banking institution, as may be specified by the
Bank by general or special order.
(2) Without prejudice to the generality of the
power vested in the Bank under sub-section (1),
the statements, information or particulars to be
furnished under sub-section (1), may relate to all
or any of the following matters, namely, the
amount of the deposits, the purposes and periods
for which, and the rates of interest and other
terms and conditions on which, they are received.
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(3) The Bank may, if it considers necessary in the
public interest so to do, give directions to non-
banking institutions either generally or to any
non-banking institution or group of non-banking
institutions in particular, in respect of any
matters relating to or connected with the receipt
of deposits, including the rates of interest
payable on such deposits, and the periods for
which deposits may be received.
(4) If any non-banking institution fails to
comply with any direction given by the Bank under
sub-section (3), the Bank may prohibit the
acceptance of deposits by that non-banking
institution.
[(5) omitted by Act 51 of 1974]
(6) Every non-banking institution receiving
deposits shall, if so required by the Bank and
within such time as the Bank may specify, cause to
be sent at the cost of the non-banking institution
a copy of its annual balance-sheet and profit and
loss account or other annual accounts to every
person from whom the non-banking institution
holds, as on the last day of the year to which the
accounts relate, deposits higher than such sum as
may be specified by the Bank.”
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` 45Q. Chapter IIIB to override other
laws.- The provisions of this Chapter shall have
effect notwithstanding anything inconsistent
therewith contained in any other law for the time
being in force or any instrument having effect by
virtue of any such law.”
On analysing section 45J, as it applies to the
relevant period, read with section 45K, it is clear that the
Reserve Bank of India insists on non-banking institutions,
which collect deposits, to provide for information in
specified forms in relation to receipt of deposits including
rates of interest payable by non-banking institutions on such
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deposits as well as the period for which the deposits may be
received. Under section 45K(4), if any non-banking
institution fails to comply with any of the directions given
by the Bank, the Reserve Bank may even prohibit the
acceptance of deposits by that non-banking institution.
These stringent provisions are made in the Reserve Bank of
India Act for a reason that companies like respondent herein
receives deposits from the public. To safeguard their
interests, the Reserve Bank, as a Regulator, insists that
every company, including respondent herein which is a non-
banking institution, has to submit its returns in the
prescribed form every year and it is in that light that the
Reserve Bank of India has specifically issued what is called
as Residuary Non-Banking Companies (Reserve Bank)
Directions, 1987.
Under para 6 of the 1987 Directions, every residuary
non-banking company has to deposit and keep deposited in
fixed deposits with public sector banks or invest and keep
invested in unencumbered approved securities or in other
investments, a sum which shall not be less than the aggregate
amounts of the liabilities to the depositors. We quote
herein-below para 6 of the said Directions, 1987.
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6. Security for depositors.- On and from 15th May,
1987-
(a) Every residuary non-banking company shall
deposit and keep deposited in fixed deposits with
public sector banks or invest and keep invested in
unencumbered approved securities (such securities
being valued at their market value for the time
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being), or in other investments, which in the opinion
of the company are safe, a sum which shall not, at the
close of business on 31st December, 1987, and,
thereafter, at the end of each half year, that is,
30th June and 31st December, be less than the
aggregate amounts of the liabilities to the depositors
whether or not such amounts have become payable:
Provided that the sum so deposited or
invested-
(a) not less than 10 per cent shall be in
fixed deposits with any of the public sector
banks;
(b) not less than 70 per cent shall be in
approved securities; and
(c) not more than 20 per cent or ten times
the net owned funds of the company, whichever
amount is less, shall be in other investments.
Provided that such investments shall be with the
approval of the board of directors of the
company.
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Explanation.-- Net owned funds” shall mean the
aggregate of the paid-up capital and free reserves as
appearing in the latest audited balance-sheet of the
company as reduced by the amount of accumulated
balance of loss, deferred revenue expenditure and
other intangible assets, if any, as disclosed in the
said balance-sheet.
(2) Every residuary non-banking company shall
entrust to one of the public sector banks designated
in that behalf, deposits and securities referred to in
clauses (a) and (b) of the proviso to sub-paragraph
(1) to be held by such designated bank for the benefit
of the depositors. Such securities and deposits shall
not be withdrawn by the residuary non-banking company,
or otherwise dealt with, except for repayment to the
depositors.
(3) Every residuary non-banking company shall
furnish to the Reserve Bank within thirty days from
the close of business on 31st December, 1987, and
thereafter, at the end of each half year, that is, as
on 30th June and 31st December, a certificate from its
auditors, being members of the Institute of Chartered
Accountants, to the effect that the amounts deposited
in fixed deposits and the investments made are not
less than the aggregate amounts of liabilities to the
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depositors as on 30th June and 31st December of that
year.
Explanation.- For the purpose of this paragraph-
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(a) aggregate amounts of liabilities” shall
mean total amount of deposits received
together with interest, premium, bonus or
toher advantage by whatever name called,
accrued on the amount of deposits according to
the terms of contract;
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(b) approved securities” means, the securities
in which the trustee is authorised to invest
trust money by any law for the time being in
force in India and bonds or fixed deposits
issued by any corporation established or
constituted under any Central or State
enactments;
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(c) public sector banks” means, the State Bank
of India, the subsidiary banks and the
corresponding new banks referred to in section
45(1) of the Reserve Bank of India Act, 1934
(2 of 1934);
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(d) unencumbered approved securities” shall
include the approved securities lodged by the
company with another institution for advance
or any other credit arrangements to the extent
to which such securities have not been drawn
against or availed of.”
The object behind issuance of para 6 is to protect the
interests of the public who are investing in fixed deposits
with the respondent herein. The object is to provide for
sufficient capital so that there is no run on such
institutions in future if they collapse. Under these
Directions, the form of Return is prescribed. It has several
parts. We are concerned with Part 5. On reading this Part,
it is clear that investments are required to be made by the
respondent herein and they are required to be shown in the
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returns which the respondent herein has to file before the
Reserve Bank of India periodically. In this case, there is
no dispute as to filing of the returns by the said respondent
before the Reserve Bank of India. The point to be noted is
that the Directions make it very clear that when respondent
herein buys bonds and debentures of approved nature, they
constitute investment and they cannot be treated as loans and
advances. Therefore, interest on such investment cannot be
taxed under the Interest Tax Act, 1974.
Before concluding, one aspect needs to be mentioned.
One of the question raised by the Department before the
Tribunal, though not specifically raised before us, was
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whether respondent herein was a credit institution” as
defined in section 2(5A) of the Interest Tax Act and,
therefore, liable to be taxed under that Act in respect of
the Assessment Year 1992-93? To answer the said question, we
need to revisit section 2(5A) of the 1974 Act which defined
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credit institution” to mean a banking company to which
Banking Regulation Act, 1949 applies or a public financial
institution as defined in section 4A of the Companies Act,
1956 or a State Financial Corporation established under
section 3 or section 3A or an institution notified under
section 46 of the State Financial Corporations Act, 1951 or
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any other financial company. The words any other financial
company” have also been defined under the 1974 Act vide
section 2(5B) to mean a company being a hire-purchase finance
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company or an investment company or a housing finance company
or a loan company, or a mutual benefit finance company or a
miscellaneous non-banking company. On a bare reading of
sections 2(5A) and 2(5B), it is clear that a residuary non-
banking company did not figure in section 2(5A) and 2(5B) of
1974 Act. Secondly, para 2 of the 1987 Directions indicates
as to what is a residuary non-banking company. We quote
herein-below para 2:
"
These directions shall apply to every
residuary non-banking company, that is to say, a
non-banking institution, being 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 and
which, according to the definitions contained in
the Non-Banking Financial Companies (Reserve Bank)
Directions, 1977, or, as the case may be, the
Miscellaneous Non-Banking Companies (Reserve Bank)
Directions, 1977, is not-
(i) an equipment leasing company;
(ii) a hire purchase finance company;
(iii) a housing finance company;
(iv) an insurance company;
(v) an investment company;
(vi) a loan company;
(vii) a mutual benefit financial company; and
(viii) miscellaneous non-banking company”
On reading para 2 of the 1987 Directions, it becomes clear
that a residuary non-banking company is a company which
receives deposits under any scheme or arrangement by way of
contributions or subscriptions or by sale of units,
certificates or other instruments or in any other manner and
which, according to the definitions contained in the Non-
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Banking Financial Companies (Reserve Bank) Directions, 1977,
or Miscellaneous Non-Banking Companies (Reserve Bank)
Directions, 1977, is not an equipment leasing company, a hire
purchase finance company, a house finance company, an
insurance company, an investment company, a loan company and
a mutual benefit financial company. According to the
Department, respondent herein fell under 'miscellaneous
finance company' in terms of section 2(5B)(vi) of the 1974
Act. According to the Department, this Finance Act, 1992
operated prospectively and that too w.e.f. 1.4.1993.
According to the Department, during the Assessment Year 1992-
93, respondent herein stood covered under sub-clause (vi) of
section 2(5B). We find no merit in this argument of the
Department. Under section 2(5B)(vi), in order to constitute
a miscellaneous finance company, it has to be a company which
carries on exclusively two or more classes of business
referred to in the preceding sub-clauses (i) to (v). In
other words, if there is a company which is investment
company and also finance company, it can fall under section
2(5B)(vi). Therefore, a residuary non-banking company cannot
fall within sub-clause (vi) as contended by the Department as
the said sub-clause specifically says that a miscellaneous
financial company should carry two or more classes of
business referred to in the preceding sub-clauses. Moreover,
unlike residuary non-banking companies, none of the companies
mentioned in sub-clauses (i) to (v) are empowered to accept
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deposits. In the circumstances, sub-clause (vi) did not
cover residuary non-banking companies prior to 1.4.1993.
In the present case, it is not in dispute that after
1.4.1993, respondent herein has been filing its returns under
the Interest Tax Act, 1974.
For the afore-stated reasons, we find no merit in the
Civil Appeals. The same are, accordingly, dismissed with no
order as to costs.
..................J.
(S.H. KAPADIA)
..................J.
(H.L. DATTU)
New Delhi,
November 24, 2009.
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