Commissioner of Income Tax, Cochin v. Harrisons Malayalam Financial Services Ltd.

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** # **PRESENT** **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 of I.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. NAIR SRI.E.K.NANDAKUMAR (SR.) SRI.K.JOHN MATHAI SRI.P.BENNY THOMAS** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 04.02.2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** ITA 416/09 -2- ## **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 appeal is with respect to the liability of the assessee to interest tax on interest on debentures. The issue stands covered in favour of the assessee and against the Revenue by a decision of the Honourable Supreme Court reported in _**(2016) 388 ITR 484 (SC)**_ _**[Commissioner of Income Tax v. Gujarat Industrial**_ _**Investment Corporation].**_ The Honourable Supreme Court found on a reading of the definition of 'interest' as contained in Section 2(7) of the Interest Tax Act, 1974 (“Act” for short) that the Act would have no application to interest on debentures. We hence answer the said question in ITA 416/09 -3- favour of the assessee and against the Revenue upholding the order of the Income Tax Appellate Tribunal. 2. The further question arising from the order of the Tribunal is as to whether the assessee is liable to pay interest tax on the interest received on a loan made to a broker. The facts as we discern from the orders of the first appellate authority is that the assessee had engaged a broker to make investments in shares and securities, the assessee being a company engaged in the purchase and sale of securities. The assessee had advanced an amount of Rs.1,30,00,000/- to the broker for the purpose of making investments on the assessee's behalf in the stock market. The advance was made on 25.10.1990. The broker made investments for the value of Rs.1,20,00,000/-. There was a balance of Rs.10,00,000/- remaining with the broker for which ITA 416/09 -4- the assessee charged interest @ 18%. In the subject assessment year, the assessee obtained interest of Rs.1,80,000/-, on which the levy was made. 3. The learned Senior Counsel, Government of India (Taxes) would contend that the interest liability would specifically come under clause (a) of Section 2(7) of the Act. The learned counsel appearing for the assessee would, on the contrary, submit that at the time of making the advance, there was never an intention for the assessee to levy interest. The entire advance was for the purpose of making investments in the stock market. The retention of the balance amounts after making investments with the broker, was also for the purpose of making further investments in the stock market. The learned counsel would also rely on the decision of the Madras High Court in _**(2011) 339 ITR**_ ITA 416/09 -5- ## _**391 (Mad) [Commissioner of Income Tax v. Integrated**_ _**Finance Co. Ltd.]**_ . 4. Having gone through the decision cited, we find that the assessee therein was also a finance company. However, the advance made was to a manufacturer of goods with whom the assessee had regular trading transactions. The assessee was involved in the business of hire purchase and lease of various equipments, some of which were manufactured by the manufacturer. The advance was in lieu of such manufacture. Hence, there is a specific trading activity and it was hence the Division Bench of the Madras High Court held that a trading advance would not fall within the parameters of a loan. The Tribunal also in the present case, deleted the levy under the Act on the premise that it is a trading advance made by the assessee to the broker. 5. We do not discern any trading between the broker and the assessee. The assessee engages ITA 416/09 -6- the broker for making investments in the stock market and there is only a service rendered by the broker through whom alone the assessee could make such investments. There being no trading activity between the assessee and the broker, it cannot be said to be a trading advance. The advance was made for making investments and after such investments were made what was retained with the broker was levied with interest by the assessee thus giving it the character of a loan. The assessee's intention at the time of advance is not at all relevant, since the character of the amounts retained with the share broker underwent a change, insofar as the levy made for interest. It is also clear that the amount remained with the broker for one year and hence the receipt of Rs.1,80,000/- as interest on a loan of Rs.10 lakhs @ 18% per annum. We hence answer the second question in favour of the Revenue ITA 416/09 -7- and against the assessee. We partly allow the appeal leaving the parties to suffer their respective costs. **Sd/-** **K.VINOD CHANDRAN JUDGE Sd/ASHOK MENON JUDGE** ITA 416/09 -8- ## **APPENDIX** ## **APPELLANT'S EXHIBITS:** **ANNEXURE-A COPY OF ORDER U/S. 8(2) R.W.S.10 THE INTEREST TAX ACT, 1974 DATED 28/02/2002 FOR THE ASSESSMENT YEAR 1994-95.** **ANNEXURE-B COPY OF ORDER DATED 18/08/2004 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE-C COPY 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