1. These two appeals are filed by the Revenue. The relevant assessment years are 1992-93 and 1993-94. These appeals are filed against the common orders of the CIT(A), Trivandrum, dt. 26th March, 1998, and arise out of the order passed under Section 8 of the Interest-tax Act.
2. The respondent-assessee in these cases is a company fully owned by the Government of Kerala. The assessee-company is designated as a holding-company of the Kerala Government to look after and manage the affairs of various subsidiary companies attached to it. All the subsidiary companies are again companies fully owned by the Government of Kerala. In its status as the holding-company for a group of subsidiary companies, owned by the Government of Kerala, the assessee-company was acting as a channelising agent for the funds disbursed by the Government of Kerala to various subsidiary companies in the form of loans and advances. The Government is rendering financial help to various subsidiary companies on the basis of their requirements as appraised by the Government and hands over the funds to the assessee-company and directs the assessee-company to release the funds to those subsidiary companies on the basis of the directions and stipulations suggested by the Government. The assessee-company is receiving substantial amounts by way of interest on such loans and advances disbursed by it to various subsidiary companies as suggested and directed by the Government. The AO was of the view that the interest received by the assessee-company against those loans and advances disbursed to various subsidiary companies were liable to the levy of interest-tax. Accordingly, notices were issued under Section 7 of the Merest-tax Act for both the assessment years under appeal. The assessee-company filed nil returns in compliance of those notices. It was the contention of the assessee-company before the AO that the assessee-company was not benefited in any manner from those transactions relating to the disbursement of loans and advances to the subsidiary companies and, therefore, the assessee-company could not be tagged with the liability under the Interest-tax Act.
3. Any how, the elaborate arguments advanced by the assessee-company were not acceptable to the AO, As per the provisions of the Interest-tax Act, certain categories of credit institutions would also come under the purview of the Interest-tax Act by virtue of Section 4(2) thereof. For that purpose, a credit institution is defined under Section 2(5A), The said definition provides four categories under the head "credit institution", which includes "any other financial company". The term "any other financial company" is again defined in Section 2(5B), which includes, among other things, also an investment company. The investment company, as defined therein, is a company which carries on, as its principal business, the acquisition of shares, stock, bonds, debentures or securities issued by the Government or a local authority or other marketable securities of a like nature. The AO was of the view that the assessee-company would come under the category of an 'investment company', because of the fact that the objects clause of the assessee-company, as found in its memorandum of association, enabled the assessee-company to carry on the business of an investment company. On the basis of those enabling provisions prescribed in its memorandum of association, it was held by the AO that the assessee-company need to be treated as an investment company, as defined in Sub-clause (ii) of Section 2(5B) and, therefore, qualifies to be a credit institution, as conceived in Section 4(2) of the Interest-tax Act. On the basis of the above finding, the assessments under the Interest-tax Act have been completed for these two assessment years.
4. The assessments were challenged in first appeal. The CIT(A) was of the view that the true nature of the activities carried on by the assessee-company could not be determined only on the basis of the objects clause stated in its memorandum of association. He found that such object clauses in its memorandum of association only enabled the assessee-company to carry on such type of business, if it actually wanted to do so. The CIT(A) was of the view that in order to hold a company as an investment company, the principal business carried on by such company should be the business of acquisition of stock and shares, bonds and debentures, etc. The CIT(A) also found that this could be determined only if one examined the accounts of the assessee-. company and verified the various sources of income enjoyed by the assessee-company. On such an examination of accounts and transactions of the assessee-company, the CIT(A) came to a conclusion that the assessee-company did not earn any income by carrying on the business of acquisition of stocks and shares. The CIT(A) found that even though the assessee-company had made investments in equity shares of subsidiaries and other public companies, such shares were not sold by the assessee-company during the relevant previous year. He found that those investments were made for the purpose of promoting public sector concerns. In view of the nature of the activities carried on by the assessee-company, as noted above, the CIT(A) held that the assessee-company could not be characterised as an investment company and, therefore, it would not come under the purview of a credit institution, and so the levy of interest-tax would not be permissible.
5. The CIT(A) also found that the contentions raised by the assessee-company were acceptable on other grounds also. He found that the loans disbursed by the assessee-company to its subsidiaries were in fact the loans granted by the Government out of its contingency funds.
Those loans were disbursed by the assessee-company strictly on the basis of the directions given by the Kerala Government. The assessee had no discretion on these matters. He found that the interest credited in the books of the assessee-company were not actually collected or received by it, but those receipts were shown only as entries in the books of account. The assessee-company has also passed corresponding entries in its books of account to show that equal amount of interest was payable to the State Government. In view of the above facts, the CIT(A) found that the assessee- company was only a collecting agent acting for the State Government and it had no discretion like any other financial institutions in the deployment of its funds and in fixing the matters like the rate of interest, period of loan, repayment schedule, etc. Therefore, he found that the case of the assessee is covered by the decision of the Hon'ble High Court of Kerala, rendered in the case of CIT v. South Indian Bank Ltd. (1995) 212 ITR 652 (Ker), where the Hon'ble Court has held that in such cases where an assessee acted only as a collecting agent, the amount collected, even if interest, could not be assessed in the hands of the collecting agents. The CIT(A) held that on the above ground also the assessee-company should be exonerated from the liability of paying interest-tax. He allowed the two appeals filed by the assessee-company.
6. It is against the above order of the CIT(A) that the Revenue has preferred the second appeal before the Tribunal.
7. The common grounds raised by the Revenue in its appeals read as below: 1. The learned CIT(A) erred in cancelling the assessments on the ground that the assessee-company cannot be considered to be an investment company under Clause (ii) of Section 2(5B), that it is not a credit institution and as such not liable to be assessed to interest-tax.
2. The learned CIT(A) ought to have found that the assessee itself has in the memorandum of association of the Company stated its main object as 'to carry on the business of an investment company' and as such was a credit institution as defined in Section 2(5A) of the Interest-tax Act.
3. The learned CIT(A) ought to have seen that the interest collected and paid to State Government is in pursuance of the objects of the company. The learned CIT(A) ought to have, therefore, considered the assessee as a credit institution falling within the definition under Section 2(5A) of the Interest-tax Act.
4. The learned CIT(A) erred in relying on the decision of the Kerala High Court in the case of South Indian Bank Ltd. (supra). The learned CIT(A) ought to have found that the facts of the case under consideration were distinguishable from the facts in the case of South Indian Bank Ltd. relied on by him." 8. We heard Shri P.I. John, the learned Senior Departmental Representative appearing for the Revenue, and Shri C.K. Nair, the learned counsel appearing for the assessee-company. The learned Departmental Representative contended that the assessee-company is an independent entity, both under the Companies Act and under the Interest-tax Act. Despite the various constraints and considerations for which the assessee-company is disbursing loans to its subsidiaries, the issue has to be considered strictly in the light of the statutory provisions regarding the levy of interest-tax. The fact to be examined in this case is whether the assessee-company has actually made loans and advances to its subsidiary companies and whether it has received interest on such loans and advances. If the assessee-company has received interest as construed above, it falls within the purview of a credit institution contemplated in the Interest-tax Act, He pointed out that all other contentions regarding the nature and functions of the activities carried on by the assessee-company are only peripheral matters not relevant for deciding the core issue raised in these appeals. Therefore, he contended that the assessee-company has to be treated as an investment company, and thereby falling under the category of credit institution liable to be assessed under the Interest-tax Act.
9. Shri C.K. Nair, the learned counsel appearing for the assessee-company submitted that the CIT(A) has passed the order on just and proper grounds. He relied on the provisions of the Companies Act, 1956, and particularly relying on the commentary of Shri A. Rama Iyer contended that the assessee-company is a holding-company instituted by the Kerala Government for the specific purpose of managing certain subsidiary companies, which are again fully owned Government companies.
Shri C.K. Nair submitted that the assessee-company has not advanced any loans or advances to any companies, other than the Government owned subsidiary companies. He pointed out that the funds necessary for making the loans and advances were made available by the Government on the basis of certain strict directions and conditions and the assessee-company had just complied with the directions and wishes of the Government in distributing those advances in the form of loans and advances to its subsidiary companies. Therefore, the learned counsel submitted that in substance the activities of giving loans and advances to the subsidiary companies is an internal corporate affair of the assessee-company in the status of a holding-company and, therefore, these transactions would not come under the purview of the Interest-tax Act. The learned counsel further contended that for the same reasons stated above, the assessee-company could not be considered as an investment company for the reason that in fact the assessee-company never made any investments of its own. All the advances and loans and investments made in the equity shares were made for and on behalf of the Kerala Government and in such circumstances the assessee-company was discharging its duties as a holding-company, and being a Government company it was only executing the directions issued by the Government, Therefore, by the nature of the Constitution of the assessee-company itself and also by the nature of the activities carried on by it, there is no basis for the AO to hold that the assessee-company was an investment company. As the assessee-company could not be considered as an investment company, it can neither be considered as a credit institution for the purpose of levy of interest-tax.
10. The learned counsel continued to argue that the assessee-company did not make any profit out of the interest collected from the subsidiary companies. The interest collected from its subsidiary companies had to be handed over to the Government and it was only acting as a necessary middle-man and therefore, there is no actual basis to contend that the interest was earned by the assessee-company.
Therefore, he submitted that the CIT(A) was justified in relying on the decision of the Hon'ble Kerala High Court in South Indian Bank Ltd. 's case (supra). He submitted that the orders of the CIT(A) may be upheld.11. We heard both sides in detail and perused the matter. In the course of hearing, we had directed the managing director of the assessee-company to file an affidavit before us regarding the nature of activities carried on by it. In compliance thereof, the managing director of the assessee-company has filed a detailed affidavit before us, and he has also filed certain relevant Government orders, which would throw light into the nature of the activities carried on by the assessee-company. We have perused those papers also.
12. The assessee-company was established by the Government of Kerala on the basis of a Government order in G.O. MS. No. 327/72, dt. 6th Nov., 1972, issued in the industries Department. The circumstances in which the assessee-company was established would be made clear if we scan through the preamble of the Government order mentioned above : "Government have been considering for sometime past the idea of setting up a Bureau'similar to the Bureau of Public Enterprises at the Government of India for coordinating and improving the efficiency of the State-owned industrial enterprises in Kerala, The Central Bureau of Public Enterprises is mainly concerned with the streamlining of orders, collection of intelligence and undertaking of specific studies. It is felt that a similar Bureau of Public Enterprises in the State would not be adequate as the problems of the State-owned companies are different. Efforts for strengthening the management at the company level have not fructified because individually the companies are too small to afford highly competent managers. To bring the totality of Government-owned companies to a size sufficient to afford top quality management, to maximise production and increase profitability and to create the necessary recourses for their growth and contribution to the future development of the State, it is found necessary to have a radical change in the present organisational set up of Government owned companies. After detailed consideration of all these aspects, Government have decided to form a holding company of Government owned companies in the State instead of a Bureau of Public Enterprises on the Central pattern." On the basis of the above G.O., the assessee-company was established as a Government holding-company and thereafter the Government had been from time to time releasing funds to the assessee-company for the purpose of transmitting the funds in the form of loans and advances to various subsidiary companies, also owned by the Government of Kerala, to meet the requirements of funds for project and working capital requirements. These are all made on the basis of the larger policy of the Government. These matters have been made clear through a letter of the Commissioner and Secretary to Government, industries Department, dt. 19th Feb., 1996, sent to the chairman and managing director of the assessee-company. A perusal of the copies of various Government orders placed before us show that the assessee-company has been disbursing funds to its subsidiary companies, like Kerala Soaps & Oils Ltd., Kerala State Detergents & Chemicals Ltd., Kerala State Drugs & Pharmaceuticals Ltd., Travancore, Plywood Industries Ltd. Kerala State Salicylates & Chemicals Ltd., etc., from time to time on the basis of the directions issued by the Government. And also, the necessary funds are seen provided by the Government to the assessee-company. Therefore, one has to see that as far, as the loans and advances made by the assessee-company to its subsidiaries are concerned, the assessee-company was acting only as an instrumentality of the State Government; rather it was acting as a Government agent. This in turn upholds.the contention of the assessee-company that it was acting as a holding-company as far as these matters of routing of finance is concerned. The interest charged by the assessee-company on those loans and advances against the subsidiary companies have been correspondingly shown as interest payable to the State Government, As rightly pointed out by the GIT(A), even though the assessee-company has made investments in the equity shares of the subsidiary companies on the directions of the Government, the company has not indulged in the sales of those shares. A reading of the entire facts of the case shows that except for the activity of carrying out the directions issued by the Government in disbursing the Government funds to various subsidiary companies, the assessee-company by itself has not carried on any activities of an investment company. Therefore, there is no question of holding that the assessee-company was carrying on the business of an investment company, We cannot say that the assessee-company has been carrying on the business of acquiring shares, etc. as its principal business, The fact that the assessee-company was acting only as an authorised agent of the State Government would be clear from another Government order issued in the industries Department in GO(MS) No.147/99/ID, dt. 22nd Oct., 1999. On the basis of the performance review conducted by the Government to make the subsidiary companies economically viable, it was decided to delink the subsidiary companies from the assessee-company w.e.f. 1st April, 1999. The said Government order was issued in the above circumstances. One of the conditions stipulated in the Government order reads as below : (b) The amount invested by KSIE in the equity of the subsidiary companies and the amount given to KSIE as loan for payment to the subsidiary companies, shall be treated as investment in the equity of the subsidiary companies and loan given to the subsidiary companies by Government respectively.".
13. The above conditions stipulated by the Government clearly demonstrate the fact that all the investments hitherto made by the assessee-company in the equity share capital of its authorised subsidiaries were in fact made only for and on behalf of the Government of Kerala and not for its independent and voluntary investment purpose.- As stated by the managing director of the assessee-company in his affidavit filed before us, the assessee-cornpany had not earned any income from channelising Government funds to its subsidiary companies and the assessee-company was not in fact dealing with investment of shares and securities, as contemplated in Section 2(5B) of the Interest-tax Act. In the circumstances, we are of the considered view that the assessee-cornpany could not be held as an 'investment company vis-a-vis a credit institution under the Interest-tax Act, as rightly held by the CIT(A). It is not proper for the AO to hold that the assessee is an investment company only for the reason that the objects clauses stated in its memorandum of association permit the assessee-company to carry on business as an investment company, if it wanted to do so. That is only an enabling provision stated in its memorandum of association, which alone is not sufficient to decide the character of the business carried on by the assessee-company during the relevant previous years.
14. The other finding of the CIT(A) that the case of the assessee would be covered by the decision of the Hon'ble High Court of Kerala in South Indian Bank Ltd. 's case (supra), is only a corollary to the main finding that the assessee was not an investment company during the relevant previous years. Therefore, that finding arrived at by the CIT(A) need not be separately considered.