Interest Tax leviable even if Company’s Main Object is not Finance: Gujarat HC [Read Judgment]

A two-judge bench of the Gujarat High Court has recently held that even if the assessee-Company is not a financial company as per its Memorandum of understanding, it can be subjected to interest tax under the Interest Tax Act for the interest earned by it.

Before the High Court, the assessee contended that its main object is not financing and that the main object of the company was of mixed nature and it would not be covered and would not be liable to pay interest under the Interest Tax Act. It was further submitted that the principal business of the assessee was the sale and purchase of shares and, therefore, the assessee was not liable to pay any interest tax.

The High Court concurred with the arguments of the department that the interest was not earned by the company on any loan or advance made but was generated out of its deposits.

“We are conscious of a clear distinction between a loan or an advance and a deposit. This has been elaborately discussed by Delhi High Court in the case of Visisth Chay Vypapar Ltd. (supra). Had adequate facts being brought on record, in this respect, we would have analyzed such material.

The Court further noted that the year under consideration was an initial year of the company and no good project was coming forth and therefore in order to avoid keeping the funds idle, the assessee had advanced money and earned interest income and also carried out activities in trading in shares and securities.

While dismissing the appeal filed by the assessee, the division bench comprising Justices Harsha Devani and Sangeeta K Vishen held that“Thus, clearly even according to the assessee, the interest was earned by advancing its funds. The case now put up before us that such investment was in the nature of a deposit and not by way of advance was never raised earlier. We do not dispute that the term “interest” defined under section 2(7) of the Act would mean interest on loans and advances and if therefore in a given case it is established that the interest earned by the assessee was not out of either loan or advance but through some other source, the interest tax would not apply to such interest. However, when no such factual dispute was raised, no material on record to hold contrary to what the assessee itself had contended before the Commissioner of Income Tax (Appeals), the contention of the counsel for the assessee must be rejected.”