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Lic of India Vs. Joint Commissioner of Income Tax - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(2002)82ITD749(Mum.)
AppellantLic of India
RespondentJoint Commissioner of Income Tax
Excerpt:
1. all these five appeals by the assessee arise out of five separate orders of the learned cit(a) dt. 28th nov., 1995, 24th july, 1996, 30th july, 1997, 28th july, 1998 and 29th oct., 1999, for asst. yrs.1992-93, 1993-94, 1994-95, 1995-96 and 1996-97 respectively. approval of the committee on disputes permitting the assessee to pursue the appeals before the tribunal is placed on record for the assessment years in question. since the point of dispute is common in all the appeals, they are being disposed of by this combined order for the sake of convenience.2. the grounds of appeal taken by the assessee are quite narrative and argumentative which is contrary to itat rules. however, the common issue is that the assessee in all these appeals is aggrieved against inclusion of interest on.....
Judgment:
1. All these five appeals by the assessee arise out of five separate orders of the learned CIT(A) dt. 28th Nov., 1995, 24th July, 1996, 30th July, 1997, 28th July, 1998 and 29th Oct., 1999, for asst. yrs.

1992-93, 1993-94, 1994-95, 1995-96 and 1996-97 respectively. Approval of the Committee on Disputes permitting the assessee to pursue the appeals before the Tribunal is placed on record for the assessment years in question. Since the point of dispute is common in all the appeals, they are being disposed of by this combined order for the sake of convenience.

2. The grounds of appeal taken by the assessee are quite narrative and argumentative which is contrary to ITAT Rules. However, the common issue is that the assessee in all these appeals is aggrieved against inclusion of interest on debentures, bonds and Government securities in the total amount of interest on loans and advances and subjecting it to interest-tax under the Interest-tax Act, 1974 (the Act).

3. Assessee, that is, Life Insurance Corporation of India (LIC for short) is a body corporate established under the Life Insurance Corporation Act, 1956 (LIC Act for short), primarily to carry on life insurance business in or outside India. For the years under consideration, assessee filed its returns of chargeable interest showing chargeable interest as follows : It was claimed by the assessee that it had not taken into account interest on Government of India securities (Government securities for short), debentures and bonds for the purpose of chargeable interest under the Act as the same could not be classified as interest on loans and advances under Section 2(7) of the Interest-tax Act, 1974 (as amended by the Finance Act, 1994).

4. Assessing Officer (AO for short) in the assessment for asst. yr.

1992-93, referred to the definitions of debentures and bonds as given by Palmer's Company Law and Halsbury's Laws of England and also referred to certain judicial pronouncements, both English as well as Indian. So far as Government securities were concerned, AO observed that these securities were nothing but bonds guaranteed by Government of India or respective States with respect to their maturity and yield therein. According to him, the whole character of bonds were applicable to Government of India securities and other securities issued by various States. Based on the above references and discussion therein AO framed the view that from the standpoint of the entity which issued the debenture or bond, money received represented a borrowing. According to him, the instrument of debenture or bond is contemporaneous with the borrowing, intended to evidence the borrowing. He was of the opinion that since one had to construe the words loans and advances made as a mirror image in the hands of the giver of what constituted money borrowed in the hands of the receiver, then, clearly amount paid towards debenture or bond constituted loan and advance made.

5. Referring to the term investment, it is stated by the AO that it is not incorrect to say that investment in its broad sweep takes in lending as well. Investment, he further states, in the business sense can be taken to connote laying out of money for interest or profit.

Therefore, in the context of Interest-tax Act, applicant could be regarded as having made a loan or advance, and interest accruing thereon may be covered by the definition of interest in Section 2(7) of the Act.

6. AO also made reference to the earlier version of the Act wherein such interest was not subject to interest-tax. In the earlier version, any interest chargeable to income-tax under the head "Interest on Securities" was specifically excluded from the purview of interest-tax.

By not incorporating such exclusionary provision in the present version of the Act, AO was of the view that actual meaning of the word 'interest' as defined in Section 2(7) of the Act will have to be given effect. Reference was made to CBDT's Instruction No. 1923, dt. 14th March, 1995. In view of the foregoing discussion, AO included interest on debentures, bonds and Government securities in total interest exigible to interest-tax. The order for asst. yr. 1992-93 was followed in the rest of the assessment years under consideration. The details of additions made in each year are as follows : 7. The above assessments were challenged before the CIT(A). In his introductory remarks, the CIT(A) has stated that whether debentures etc. are loans and advances or not, has to be examined not with reference to the credit institution, but it has to be examined with reference to legal principles. Next, it is stated that the expression "loans and advances" is neither defined in the Interest-tax Act nor in any other taxing statute. The definition of the term "debentures" given in Companies Act, though is meant for the purposes of that Act, but even that definition does not exclude debenture from the expression "loans and advances" mentioned in Section 2(7) of the Act. According to the CIT(A), circulars or directions issued by the Reserve Bank of India under the RBI Act or Banking Regulation Act are not of any assistance in interpreting the term "loans ad advances" 8. In para 4.2 of his order, CIT(A). after referring to certain case laws, expresses the view that the definition of a word or expression in one statute cannot be applied to another statute. Even the analogy of one taxing statute cannot be applied in interpreting the provision of another taxing statute. It is further stated that in spelling out the meaning of a word in a section, one must take into consideration the setting in which the terms are used and the purpose they are intended to serve. Accordingly, it is observed by the CIT(A) that the definition of debentures etc. in Companies Act or other Act is not relevant for the purpose of considering the expression "loans and advances" under the Interest-tax Act.

9. In para 4.3 it is stated that Companies Act is not pari materia with Interest-tax Act. Hence, proforma in schedule VI of the Companies Act is not at all relevant to consider the scope of an expression under the taxing statute. According to the CIT(A), it is immaterial whether securities and debentures are shown an investments by the assessee itself or under the directions of some authority or under the provisions of statutes like Companies Act or Banking Regulation Act.

10. In para 4.4, CIT(A) after referring to certain judicial pronouncements observes that : (i) the words should be understood in the sense in which they best harmonize with the subject of the enactment and the object which the legislature has in view; (ii) commercial practice and trading principles could vary. These terms are rather vague and indefinite. The meaning of the relevant statutory provisions seem to be much more fixed and definite.

Whatever commercial practice or trading principles may imply or import, they could not alter the meaning of statutory provisions or travel beyond it; (iii) the accounts to be maintained in a particular manner is no criteria or evidence for determining when the liability arises.

Liability to tax would be determined with reference to the interpretation of the statute which created it and not by referring to another statute : (iv) substance of the matter cannot be altered by a mere method of accounting; Based on the above discussion, CIT(A) observed that showing debentures etc. under the head "investment" in view of the provisions of the Companies Act or Banking Regulation Act cannot be relevant for the purpose of determining the scope of expression "loans and advances" under Section 2(7) of the Interest-tax Act.

11. In para 5, CIT(A) refers to certain decisions of the Hon'ble Courts which have considered the expression "loans and advances". Reference is made to the decision of the Bombay High Court in the case of CIT v.P.K. Badiani (1970) 76 ITR 369 (Bom) for the proposition that if the payment is made by the lender to the borrower, then such payment would amount to loan because the relationship of the creditor and borrower is created by such transaction, Another decision of the Bombay High Court in the case of CIT v. Jamnadas Khimji Kothari (1973) 92 ITR 105 (Bom) is referred to for the proposition that if there are such transaction between two parties and as a result of such transactions one party becomes debtor to the other, then the amount advanced by the creditor to the debtor will be considered as a loan and advance. The case of M.D. Jindal v. CIT (1987) 164 ITR 28 (Cal) is referred to for the proposition that it is not necessary that in the case of loans and advances the payment should be by cash only. Even transfer of goods may amount to advance by a person. Reference is made to the commentary by Shri A. Rarnaiya in his Guide to Companies Act (10th edition, 1984), with regard to Section 295 of the Companies Act which deals with loans to directors. Referring to the four elements of a loan as mentioned by Shri A. Ramaiya, CIT(A) observes that loans and advances are transactions of lending of money or transfer of goods by the creditor to the borrower under an agreement under which there is recognition of liability on the part of the borrower to return it with or without interest.

12. Para 6 of the order is devoted to explain how debenture is a loan or advance. Again, the treatise of A Ramaiya on Companies Act is referred to at length. Supreme Court decision in India Cement Ltd. v.CIT (1966) 60 ITR 52 (SC) is referred to Kerala High Court decision in Western India Plywood Ltd. v. CIT (1960) 38 ITR 533 (Ker) is referred to. Finally, it is held that debenture is an instrument acknowledging indebtedness of a specified sum. The holder of debenture obtains debenture certificate in token of his having advanced the amount. When a holder of debenture sells it to another person, then the purchaser of debenture becomes creditor of the company in place of original holder.

Therefore, debenture is held to be a loan and advance to the company and interest on debenture is held to be includible in the total interest.

13. Para 7 of the CIT(A)'s order pertains to bonds. It is observed that the nature of bonds is the same as that of debentures. The transferability of a bond or debenture is held to be an arrangement on account of agreement between the holder and the borrower company. This arrangement, it is observed, does not violate the elements of loans because unsecured loan can also be transferred under Section 130 of the Transfer of Property Act, 1882.

14. Para 8 of the CIT(A)'s order speaks about Government securities. It is held that loans taken by Government from public are declared as securities and are popularly known as securities. But their declaration as such do not change or damage the character of loans. Sec, 40(a)(i) of the IT Act is referred wherein it is clarified that Government, securities are loans issued for public subscription, Thus, interest on Government securities is held to be includible in total interest under Section 2(7) of the Act.

15. In para 9, CIT(A) states that Government loans, bonds etc. are declared as securities for specific purposes so that a public charitable trust may acquire such securities either by purchase or by subscription. The declaration of securities in respect of loan does not in any way violate the fundamental and essential element of loans and advances.

16. In para 12, CIT(A) refers to the rule of "Ex Visceribus Actus" and observes that other provisions of the same statute will have to be considered while interpreting the expression or word in a particular provision because the order provisions of the statute will be extremely helpful in exposing the context in which the expression "loans and advances" have been used. In this context he refers to Section 28 of the Act, which according to him, postulates that there are various categories of loans and advances which are included in the expression "loans and advances" under Section 2(7) of the Act. It is also observed that the term "loans and advances" are generic terms and it includes debentures, bonds and loans taken by Government which are called securities because, all these forms are means of obtaining loans, and advances by different modes and includible in the expression "loans and advances" mentioned in 5.2(7) of the Act. According to him, there is no assumption that words "loans and advances" have been used in a restricted sense in Section 2(7) of the Act in view of the provisions of Section 28 of the Act.

17. Reference is then made to the definition of the term "Interest" given in Section 2(28A) of the IT Act, 1961 (IT Act for short) and to the definition of the expression "Interest on Securities" given in Section 2(28B) of the IT Act r/w Section 2(10) of the Interest-tax Act and it is held that Government security and other securities are special categories of loans and advances as they are secured by Government and local authorities.

18. In para 14 to 16, CIT(A) refers to the following decisions for the propositions mentioned against each of them : (a) Kirloskar Pneumatic Co. Ltd. v. Commr. of Surtax (1994) 210 ITR 485 (Bom) for the proposition that debentures were form of borrowings, which means that debentures are only loans and advances; (b) State Bank of Mysore v. CIT (1989) 175 ITR 607 (Kar) for the proposition that the term "loans and advances" is not to be restricted to merely cash transactions between two persons but it includes all categories of loans and advances which involves monetary transactions for which compensation is payable for delayed payment of money due.

(c) CIT v. Vijaya Bank (1989) 175 ITR 611 (Kar) to show that interest on loans and advances as mentioned in Section 2(7) of the Act has been broadly interpreted and not in a restricted sense.

19. Lastly, CIT(A) deals with the argument of the assessee that interest only on those loans and advances is chargeable to tax which is elastic in the sense that interest rate could be jacked up by the credit institutions. This argument was based on the speech of the Finance Minister while presenting the budget for 1991-92 wherein it was stated that credit institutions were entitled to reimburse themselves by making necessary adjustments in the interest rates charged from the borrower. According to the CIT(A), the speech of the Finance Minster refers only to term loans mentioned in Section 26C of the Act. It is further observed that it is nowhere mentioned that only those loans and advances are subject-matter of interest-tax in which interest rate can be increased by the institutions. Finally, it is observed that Section 28 of the Act clearly demonstrates that there are various categories of loans and advances and, therefore, the term "loans and advances" in Section 2(7) should be considered from a legal and proper sense.

20. Based on the above discussion, broadly noted by us in pp. 7 to 19 above. CIT(A) held that the AO was justified in including the interest on debenture, bonds and Government securities in the total amount of interest on loans and advances.

21. Mr. P.J. Pardiwala, Advocate, appeared for the assessee. At the outset, the learned counsel gave a brief history of the Interest-tax Act which was introduced in 1974. The objects and reasons for enacting the legislation were referred to [(1974) 96 ITR (St) 31). The tax was withdrawn in 1978, reintroduced in a modified form in 1980 and again withdrawn in 1985. On its reintroduction by Finance (No. 2) Act, 1991 w.e.f. 1st Oct., 1991, the scope was enlarged by inserting Sub-section (2) in Section 4 to include certain credit institutions over and above the scheduled banks. The speech of the Finance Minister while reviving the levy in 1991 was referred to [(1991) 190 ITR (St) 89 at p. 114].

Our specific attention was drawn to the following observations of the Hon'ble Finance Minister : "These institutions would reimburse themselves by making necessary adjustments in the interest rates charged from borrowers. The proposed tax is expected to raise the cost of borrowing and yield revenue to the Government. It should, therefore, have both monetary and fiscal impact." Special emphasis was laid by Mr. Pardiwala on the expression "reimburse themselves" to drive home the point that with regard to interest earned on Government securities and debentures, the credit institutions could not reimburse themselves and hence such interest cannot attract the levy of tax. The tax has since been withdrawn in relation to interest arising to credit institutions on or after 1st April, 2000. Our attention was drawn to the following extract from the notification withdrawing the tax [(2000) 245 ITR (St) 60].

"There was a persistent demand from the banks and the financial institutions to abolish interest-tax in order to make credit cheaper to the borrowers. The Reserve Bank of India has also recommended the termination of interest-tax. The Act, therefore, amends Section 4 of the Interest-tax Act to provide that the Interest-tax Act shall not be applicable in relation to interest arising to credit institutions on or after the 1st day of April, 2000".

Thus, from the above also it was sought to be emphasized that the institution was not expected to bear the burden of interest-tax but the same was to be recovered from the borrower which it could not do in respect of interest on Government securities and debentures.

22. Next, Mr. Pardiwala referred to the definition of the term "interest" as defined in Section 2(7) of the Act, which is as follows : "Interest' means interest on loans and advances made in India and includes : (a) commitment charges on unutilized portion of any credit sanctioned for being availed 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 43 of the Reserve Bank of India Act, 1934 (2 of 1934)' The contention was that the definition uses the expression "means and include" which indicates that the definition is exhaustive and hence interest on Government securities and debentures will not form part of chargeable interest under the Act. The main thrust was to charge interest earned on loans and advances and not the interest earned on investments. To explain the purport of the expression "means and includes", reliance was placed on the decision of the Supreme Court in the case of Mahalakshmi Oil Mills v. State of Andhra Pradesh AIR 1989 SC 335.

23. To drive home the point that making of loans was distinct from investing in securities, Mr. Pardiwala referred to the wordings in Section 27 and 27A of the Insurance Act, 1938. It was submitted that both the sections used the expressions "shall invest" and "keep invested". According to him these expressions indicated merely investment in securities and not making of loans. The Form of balance sheet prescribed in Form A in Schedule I to the Insurance Act was referred to, to show that in the balance sheet also there were distinct heads of "loans" and "investments". Definition of "Financial Company" as defined in Section 3(5B) of the Interest Tax Act, was referred to.

It was submitted that Clause (ii) and Clause (iv) in the said definition clearly made a distinction between an investment company and a loan company. Thus, it was emphatically argued that making of loan was distinct from making an investment.

24. It was submitted that the only decision on the point was that of the Madras High Court in the case of CIT v. Lakshmi Vilas Bank Ltd. (1997) 228 ITR 697 (Mad) wherein it was held that where banks show debentures under the head "investments", the debentures are in the nature of securities. Interest on such debentures must be treated as interest on investments which fall outside the purview of the Interest-tax Act, 1974, and not as interest on loans and advances taxable under the Interest-tax Act, 1974. It was further pointed out that the only decision against the assessee was that of the Hyderabad Bench of the Tribunal in the case of State Bank of Hyderabad v. Dy. CIT (1998) 61 TTJ (Hyd) 678 : (1998) 66 ITD 464 (Hyd). The said decision, it was submitted, did refer to the decision in Laxmi Vilas Bank (supra) but did not deal with the same and hence the issue stands squarely covered by the decision in Laxmi Vilas Bank (supra).

25. The earlier definition of the term "interest" as defined in Section 2(7) of the Act, specifically excluded interest chargeable under the head "interest on securities" from the purview of interest-tax, This exclusion, it was submitted, was inserted by way of abundant precaution. Its deletion in the new definition was merely to bring it in line with the provisions of the IT Act in which Sections 18 to 21 were deleted w.e.f. 1st April, 1991. In this connection, decision of the Supreme Court in the case of Sun Export Corporation v. Collector of Customs 111 STC 69 was relied upon and also the decision in CIT v.Madurai Mills Co. Ltd. (1973) 89 ITR 45 (SC) was cited.

26. The Board issued a notification No. 9858/F. No. 160/2/94-ITA-I dated 11th Sept., 1995 under Section 28 of the Act exempting bank from the levy of interest-tax in respect of their income from interest on securities with effect from financial year 1995-96. The submission of Mr. Pardiwalla was that this notification should be treated as clarificatory in nature, and moreover, Section 26C of the Act bears testimony to the fact that credit institutions could reimburse themselves to the extent of interest-tax by varying the terms of agreement. Reliance was also placed on the decision of the Bombay High Court in the case of CIT v. Aloo Investment Co. Ltd. (P) Ltd. (1980) 123 ITR 132 (Bom).

27. Alternatively, it was contended by Mr. Pardiwalla that if at all interest-tax has to be levied on interest on securities, debentures etc., only that portion should be taxed which has been earned on direct subscription and not on those securities which are purchased from the market.

28. Finally, it was submitted that where two views are possible, the one favouring the assessee should be adopted. For this contention, reliance was placed on the decisions of the Supreme Court in the case of CIT v. Shaan Finance (P) Ltd. (1998) 231 ITR 308 (SC) and in the case of Mysore Minerals Ltd. v. CIT (1999) 239 ITR 775 (SC).

29. Mr. S.D. Kapila, the learned Departmental Representative assisted by Mr. Deepak Tralshawala, presented the case for the Department. At the outset, it was sought to be clarified that LIC is not a bank, LIC enjoyed a unique position in the economy of the country till the recent entry of private enterprises in the life insurance sector. Its business is dictated by the Insurance Act, 1938 and is the creature of the Life Insurance Corporation Act, 1956. Therefore, according to Mr. Kapila, any reference to Banking Regulation Act was to be ignored. The Hyderabad Bench in the State Bank of Hyderabad case (supra), the only decision in favour of the revenue, rightly did not refer to the Banking regulation Act, whereas the other decisions of the Tribunal which are in favour of the assessee, heavily relied on it. Hence, it was submitted that it was just proper to follow the decision of Hyderabad Bench. Reference was made to Section 2(3) of the Insurance Act which defines the term "approved securities". As per the said definition, Government securities fell within the meaning of the term "approved securities". Reference was then made to Section 27 group of provisions of the Insurance Act which according to Mr. Kapila charted the business parameters of LIC. As per Clause (c) of Section 27(2), prescribed assets were deemed to be assets invested or kept invested in approved investments specified in Section 27A(1) of the Insurance Act. Certain specific clauses like (c), (m), (o) of Section 27A(1) were referred to.

These clauses referred to certain types of loans which were regarded as investments. Sections 27A(10) and 27A(14) were referred to as per which controlled fund of LIC included all types of funds. Section 27C prohibits the insurer to directly or indirectly invest outside India the funds of the policy holders. This did not mean, argued Mr. Kapila, that the assessee could make loans outside India if making of loans were to be distinguished from investing in securities. Section 27D provides for the manner and conditions of investment which could be prescribed by the Insurance Regulatory and Development Authority (Regulatory Authority for short). This provision, it was submitted, did not mean that the prescription could be only will regard to investment in securities but it also meant investment by way of making loans.

Again, under Section 28, insurer was under an obligation to furnish an annual statement showing assets held invested in accordance with Section 27. Section 27, as mentioned earlier, did not make any distinction between investment in Government securities and making of loans. Section 29(3) prohibited the insurer from granting any loan except as specified in Section 27A. Again, it was submitted, Section 27A provided for various modes of investment, which, inter alia, included making of loans as well as investment in securities. Section 6 of the LIC Act and Rule 10B(h) of the Insurance Rules, 1939 were also referred to. In short, by referring to all these provisions, Mr. Kapila tried to impress upon us that there was no distinction between investments made in Government securities, bonds, debentures on one hand, and investment made by way of loans on the other. The seggregation in balance sheet into loans and investment in securities was a matter of form and presentation and it did not give the true character of the investment of funds.

30. The meaning of the term "investment" as given in Black's Law Dictionary was referred to. As per the said dictionary, it was an expenditure to acquire property or other assets in order to produce revenue, or the asset so acquired. It also meant placing of capital or laying out of money in a way intended to secure income or profit from its employment. Similarly, the meanings of the terms "loan", "securities" and "term loan" were also referred to. Our attention was drawn to the decisions of Privy Council in the case of Punjab Co-operative Bank Ltd. v. CIT (1940) 8 ITR 635 (PC), of the Andhra Pradesh High Court in the case of Andhra Pradesh State Financial Corporation Ltd. v. CIT (1984) 150 ITR 533 (AP) in which the decision of the Supreme Court in the case of is also referred to. The main plank of Mr. Kapila's argument by referring to all these decisions was that so far as insurance and banking sector were concerned, the term "investment" had amplitude and the most comprehensive sense it included loans also.

31. Referring to the definition of Government securities, it was submitted that the definitions given by the General Clauses Act, 1897 or that given by the Securities Contracts (Regulation) Act, 1956 (Securities Act for short), gave only a label of Government securities to certain securities. But the real definition was to be found only in Public 'Debt Act, 1944 (P.D. Act for short). The definition clearly meant that securities created by the Government were for the purpose of raising a public loan and could take any of the four forms mentioned therein. One of the forms specified was a promissory note payable to order. In this connection, our attention was drawn to a Commentary by Bhashyam on Negotiable Instruments Act. The sum and substance of the argument was that if indebtedness is acknowledged in a document in a defined sum of money payable 'on demand', that is enough to make the document a promissory note and the document need not necessarily say that the debtor promises to repay the amount. Thus, it was contended that by acquiring a Government security, Government was the borrower and LIC was the creditor.

32. Advancing further his arguments, it was submitted by Mr. Kapila that before its revival in 1991, Interest-tax Act, applied only to scheduled banks. LIC was a later inclusion and, therefore, there appears to be a mismatch. The concepts which apply to banks, need not apply to LIC. Referring to the definition of the term "interest" as defined in Section 2(7) of the Act, it was submitted that in the earlier version of the Act, amount chargeable to income-tax under the IT Act under the head "Interest on Securities" was specifically excluded from the purview of the Act. Dropping of this provision in the new version could not be said to be clarificatory, because, with the omission of the head "Interest on Securities" and consequential omission of Section 18 to 21, Section 2(28B) was inserted in the IT Act defining the term "interest on securities". Reference was made to Notification No. 9858/F.No. 160/2/94-ITA-I dt. 11th Sept., 1995, issued under Section 28 of the Act whereby banking companies were specifically exempt from the levy of interest-tax in respect of their income from interest on securities with effect from financial year 1995-96. In this connection it was submitted that this was a Notification by a proper authority by way of delegated legislation which could be struck down only by a High Court or Supreme Court and hence, Tribunal was bound to give full effect by not exempting LIC from the levy of interest-tax.

Instruction No. 1923, dt. 14th March 1995, issued by the Board was also referred to. As per the said Instruction, by not incorporating the exclusionary provision (i.e., relating to interest on securities), in the new version of the Act., natural meaning of the word "interest" as defined in Section 2(7) of the Act had to be given effect, and therefore, interest on debentures, bonds, securities etc. was exigible to interest-tax. These two documents, it was stressed by Mr. Kapila, showed that LIC stood on different footing altogether as compared to the banks, moreso for asst. yr. 1996-97. Notification itself could not be said to be clarificatory because no exemption could be deemed to be clarificatory. It was stated to be a positive act of the sovereign.

Again, as to why treasury bills were specifically excluded, despite being a specie of promissory note, it was contended that they were sold by auction and the burden could have fallen on the Government itself.

33. Mr. Kapila then referred to certain decisions relied upon by Mr.

Pardiwalla. With regard to the Madurai Mills case (supra), it was submitted that the said decision explained the impact of a proviso in a section. But in any case, the main provision had to be seen first, and then only the proviso. The decision was not applicable to Section 2(7) as the said provision had to be read in entirety as a whole sentence.

The case of Sun Export Corporation (supra), it was submitted did not pertain to a statutory enactment but concerned itself with notifications and hence was not applicable. As regards the decision of Madras High Court in the case of Lakshmi Vilas Bank (supra), it was submitted that the High Court heavily relied on Section 29 of the Banking Regulation Act. On the other hand, under the Insurance Act, all loans, advances etc. were treated as investment and hence there was no distinction between loans and advances on the one hand and investment in securities on the other. Thus, it was contended that all the decisions which relied on the provisions of the Banking Regulation Act, should be ignored.

34. Finally, it was submitted by Mr. Kapila that if the appeals of the assessee were to be dismissed, they will not be contradicting the decisions of the Tribunal in favour of the assessee as they were rendered on a different footing inasmuch as that they dealt with banking entities whereas the assessee's case pertained to insurance business wherein the meaning of the term "investment" was in a different context. If the appeals are not to be dismissed, then, it was submitted, the matter should be referred to a Special Bench of the Tribunal.

35. Mr. D.J. Tralshawala, the learned Departmental Representative also supplemented the arguments advanced by Mr. Kapila. Our attention was drawn to paras 4.1 and 4.2 of the CIT(A)'s order. The observations of the CIT(A) in these paras are summarized by us in para 7 and 8 of this order. Then our attention was drawn to paras 5.1, 5.3 and 5.5 of the CIT(A)'s order. These observations are summarized by us in para 11 of this order. Pages 13, 19, 16, 20 and 23 of the CIT(A)'s order were referred to. The observations on these pages have been noted by us in paras 12, 13, 14 and 15 of this order.

36. After referring to the abovementioned observations in the order of the CIT(A), two main points were stressed by Mr. Tralshawalla. Firstly, it was submitted that since the term "loans and advances" is not defined in any of the taxing statutes, its meaning as understood commonly should be adopted. Secondly, it was contended that the expression "means and includes" suggest that the definition is intended to be exhaustive and not extensive. Heavy reliance was placed on the decision of the Supreme Court in the case of P. Kasilingam and Ors. v.P.S.G. College of Technology and Ors. (AIR 1995 SC 1395). It was contended that this decision was also considered by the Allahabad Bench of the Tribunal in Sahara Group of case, a copy of which is placed at pp. 81 to 129 in assessee's paper book.

37. In his counter-reply. Mr. Pardiwalla submitted that there was an apparent contradiction between what Mr. Kapila stated and what Mr.

Tralshawala submitted. According to Mr. Kapila, definition of the terms "Government security" given in Public Debt Act was relevant, whereas as per Mr. Tralshawalla a commonsense approach had to be adopted. There was a clear distinction between investment in Government securities on the one hand, and loans and advances on the other. The distinction was clear in Section 27A of the Insurance Act. Further, Insurance Act itself distinguished between a loan company and an investment company and the definition given in Public Debt Act was considered by all the decisions of the Tribunal in favour of the assessee. If the argument of Mr. Tralshawala regarding common parlance was to be accepted, then that meaning should be adopted what the trade understands under normal circumstances. Reflection of the amounts under different heads in the balance sheet, it was submitted, may not be determinative, but it certainly reflected the intention. The objective of the legislation was juxtaposed against Revenue's argument that in case of Government securities, Government is the borrower, and was contended that there was no logic in saying that if Government needed money, LIC should bear the burden of interest-tax. Ultimately, borrower has to bear the cost.

When the Interest-tax Act was revived in 1991, it was revived with a wider tax base. Wider tax base in this context meant bringing more entitles within the tax net and did not mean to widen the scope of chargeability. Thus, it was contended that there was no substance in any of the arguments of the Revenue.

38. We have been in a state of solicitousness during the entire course of hearing and have befittingly heard the oppugnant polemics.

39. In these appeals, we are concerned with Interest-tax Act, 1974. The title suggested that it was an Act to impose a special tax on interest in certain cases. The adjective "special" suggests that the tax is special in so far as that it applies to certain class of assessees and that it is interest-specific. For the first time it came into effect from 1st Aug., 1974 and remained in force upto 28th Jan., 1978. It was revived from 1st July, 1980 and continued upto 31st March, 1985.

Finance (No. 2) Act, 1991, again brought into force the Act w.e.f. 1st Oct., 1991. The operation of the Act has again been suspended since 1st April, 2000. In its last reincarnation in 1991, the Act was put into operation with added vigour and vitality. During the first tenure of its operation, the Act was applicable only to scheduled banks. During the second tenure, the definition of "scheduled banks" was widened to include institutions like IFCI, IDBI, IRCI and ICICI. In the third tenure, the scope was further widened by amending the charging Section 4 to include credit institutions and make them liable to tax.

Simultaneously, Clause (5A) was added in Section 2 to define the terra "credit institution". But the term "credit institution" was meant, (i) a banking company to which the Banking Regulation Act, 1949 applies, (ii) a public financial institution as defined in Section 4A of the Companies Act, 1956, and (iii) a State Financial Corporation; and (iv) any other Financial company. Consequentially, Clause (5B) was also added to Section 2 to define the term "financial company". In the present appeals we are not concerned with the term "financial company" as defined in Section 2(5B) of the Act, The assessee before us falls within the definition of a "public financial institution" as defined in Section 4A of the Companies Act, 1956. Before we proceed further, for the sake of completeness, it may be noted that the assessee before us, i.e., Life Insurance Corporation of India (LIC) was established under Section 3 of the Life Insurance Corporation Act, 1956 (LIC Act), primarily to carry on life insurance business. Besides the LIC Act, the assessee is also subject to the Insurance Act, 1938.

40. Earlier we noted that the Act is interest-specific and its purpose is to levy tax on interest income of credit institutions. We have also noted that in its 1991 format, the Act came back with added vigour.

Hence, it would not be out of place to compare the definition of the term "interest" as it was earlier with that of the amended definition.

Prior to its substitution w.e.f. 1st Oct., 1991, the earlier definition as given in Section 2(7) was as follows ; "(7) "interest" means interest on loans and advances made in India and includes : (a) commitment charges on unutilized 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) any amount chargeable to income-tax, under the IT Act, under the head "Interest;on Securities" (ia) interest referred to in Sub-section (1B) of Section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); (iii) interest on any term loan sanctioned before the 18th day of June, 1980, where the agreement under which such loan has been sanctioned provides for the repayment thereof during a period of not less than three years; Explanation : For the purposes of this sub-clause, "term loan" means a loan which is not repayable on demand; (iv) interest on any deferred credit (that is to say, credit on the terms that the payment is to be deferred) sanctioned by a Schedule bank in connection with the export of capital plant and machinery outside India; (v) interest on any loan in foreign currency sanctioned by any corporation or bank referred to in Sub-clause (a) or Sub-clause (b) or Sub-clause (c) or Sub-clause (d) of Clause (9) for the import of capital plant and machinery from a country outside India." "(7) "interest" means interest on loans and advances made in India and includes : (a) commitment charges on unutilized portion of any credit sanctioned for being availed 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); Much has been argued before us about the expression "means and includes" appearing in the above definition. The two sides have referred to two different decisions of the Supreme Court. Let us consider those decisions : The Supreme Court was considering the following definition of "tobacco" as defined in Central Excises and Salt Act, 1944.

"Tobacco means any form of tobacco, whether cured or uncurred and whether manufactured or not and includes the leaf stalks and stems of tobacco plant, but does not include any part of a tobacco plant while still attached to the earth." The question was whether tobacco seed, tobacco seed oil and tobacco oil cake fell within the above definition, It was argued on behalf of the assessee that the word "tobacco" in its ordinary connotation, takes in the tobacco plant and every part of it, including the seed. The definition also makes it clear that it takes in every form of tobacco, manufactured or unmanufactured. Thus, tobacco seeds, not only when they are in their raw unmanufactured state but also when, on manufacture, they manifest themselves in the form of tobacco seed oil or tobacco seed cake and will fall within the definition. On the other hand, on behalf of the State it was submitted that the definition, which covers both what the expression means as well as what it includes, is exhaustive. Tobacco seed does not come within the first part of the definition, for the expression "tobacco cured or uncured, manufactured or unmanufactured" has to be read as a whole and will not take in tobacco seed. It will not come under the second part because it specifically mentions leaves, stalks and stems but leaves out seeds.

Since tobacco seeds do not fall within the definition, the oil and cake produced by the crushing of the seeds will not also be covered by the definition or be eligible for the consequent exemption.

41. The Supreme Court held as follows : (at pp. 339 and 340 of the report) "We are inclined to accept the contention urged on behalf of the State that the definition under consideration which consists of two separate parts which specify what the expression means and also what it includes is obviously meant to be exhaustive. As Lord Watson observed in Dilworth v. Commissioner of Stamps, (1899) AC 99, the joint use of the words "mean and include" can have this effect. He said, in a passage quoted with approval in earlier decisions of this Court : "Section 2 is, beyond all question, an interpretation clause, and must have been intended by the legislature to be taken into account in construing the expression "charitable device or bequest", as it occurs in Section 3. It is not said in terms that "charitable bequest" shall mean one or other of the things which are enumerated, but that it shall "include" them. The word "include" is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import, but also those things which are interpretation clause declares that they shall include. But the word "include" is susceptible of another construction, which may become imperative, if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions defined. It may be equivalent to "mean and include", and in that case it may afford an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expression." Looking therefore, at the terms of the definition more closely, it is quite clear that tobacco seeds do not fall within the second or inclusive part of the definition. This part of the definition is important. Specifically excludes from the definition any part of the tobacco plant so long as it is still attached to the earth. It makes mention only of parts of the plant after it is severed from the earth. It is common knowledge that when a plant is severed from the earth, its parts will comprise of not only the leaves, stalks and stems but also the seeds. Yet the inclusive part of the definition enumerates only the leaves, stalks and stems and deliberately, one should think, avoids mention of seeds." In short, it was held that when the definition consists of two parts which specify what the expression means and also what it includes is obviously meant to be exhaustive.

In this case the Supreme Court was considering whether a private engineering college is governed by the provisions of the Tamil Nadu Private Colleges (Regulation) Act, 1976 and the Tamil Nadu Private Colleges (Regulation) Rules, 1976. The following definition of the expression "college" as defined in Rule 2(b) of the Rules came up for consideration : "College means and includes arts and science college, teachers training college, physical education college, oriental college, school of institute of social work and music college maintained by the educational agency and approved by, or affiliated to the university".

It was urged before the Supreme Court that in Rule 2(b) the expression "means and includes" has been used which indicates that the definition is inclusive in nature and also covers categories which are expressly mentioned therein. The Supreme Court did not agree with this argument.

It held that use of the words "means and includes" in Rule 2(b) would, therefore, suggest that the definition of "college" is intended to be exhaustive and not extensive and would cover only the educational institutions falling in the categories specified in Rule 2(b) and other educational institutions are not comprehended.

43. Thus, both the decisions of the Supreme Court have held that when the term "means and includes" is used, the definition is meant to be exhaustive and neither extensive nor inclusive. In order words, when only the term "means" is used it gives a hard-and-fast definition whereas when only "includes" is used, it enlarges the meaning of the expression defined so as to comprehend not only such things as they signify according to their natural import but also those things which the clause declares that they shall include. On the other hand, when the term "means and includes" is used, it indicates an exhaustive explanation of the meaning.

44. In the light of the above discussion, let us consider the definition of the term "interest" given in the Interest-tax Act.

Primarily, the term "interest" is meant to be interest on loans and advances. But the definition does not stop here. It goes on to include two more items. The two items are commitment charges on unutilized portion of credit and discount on promissory notes and bills of exchange. As per the natural import of term "interest", but for the specific inclusion, these would not have been considered as interest.

It is perceived that, though by nature as well as nomenclature, the two items may not strictly be regarded as interest, but they have some hue of interest and hence the meaning of the term "interest" is extended to include these two items, But the extension has to stop here only and cannot go further. There may be some other items also which, though strictly may not be interest, but may be having some characteristics of interest. However, considering the meaning of the expression "means and includes" as explained by the above two decisions of the Supreme Court, no more items can be included in the definition except the two specifically included by the legislature.

45. Having discussed the principles of interpretation, we now proceed to actually interpret the definition of the term "interest". It primarily means interest on loans and advances. The Interest-tax Act does not provide the meaning of the expression "loans and advances".

The Insurance Act also does not define the expression. Nor does the LIC Act provides any clue. The Law Lexicon by P. Ramanatha Aiyar (2nd edition 1997) gives the meaning of, the terms "loan" as follows (at page 1139) : "Loan : As a noun, a lending, that which is lent; a permission to use a bailment of an article for a certain time to be used by the borrower. Loan may include the lending of anything, a horse, a carriage, a book, or any kind of goods, as well as money. To loan is to lend a thing to another, either gratuitously or for record. In order to constitute a loan, there must be a thing loaned, a lender, and a borrower, as well as a contract between the parties. Where the relation between a depositor in a bank and his banker is that of debtor and creditor, simply, the transaction cannot in any proper sense be regarded as a loan, unless the money is left, not for safe keeping, but for a fixed period at interest, in which case the transaction assumes all the characteristics of a loan. "Escept with respect to money, 'to loan' implies that a thing is delivered to another for use, without reward, and to be returned in specie." (AIR 1937 Oudh 124)" The term "advances" has many meanings, but for our purposes it only means advances which are in the nature of loans. Hence, it would be sufficient if the true purport of the term "loan" is understood in the context of Interest-tax Act. From the above meaning, it is clear that when a person lends money to the other, with or without interest, it is a loan. In this sense of the term, in the present appeals, there is no dispute and the assessee has paid tax on interest earned on such loans and advances. But the dispute has arisen with regard to interest on bonds, debentures and Government securities. In our opinion, since the primary meaning of the term "interest" as per Section 2(7) is interest on loans and advances, interest earned on the abovementioned instruments can fall within the definition only if monies put into these instruments can be properly regarded as loans and advances.

46. There is no dispute about the characteristics of bonds, debentures and Government securities discussed by the CIT(A) in his order. In fact, the words debentures and bonds are often used interchangeably and sometimes Central or State Government loans are described as Government bonds. In short, these are all fixed interest bearing securities or debt instruments and except where necessary, we shall commonly refer to them as bonds.

47. Much stress has been laid by Mr. Kapila on Sections 27A and 27B of the Insurance Act which contain provisions regarding investments. The crux of his argument is that the said provision does not make any distinction between loans and securities. Both are treated as investments. He has also referred to the meaning of the term "investment" as given in Black's Law Dictionary. Amongst the several meanings, the meaning relevant for our purpose is "the placing of capital or laying out of money in a way intended to secure income or profit from its employment". In short, his thrust has been on the meaning of the term "investment" and according to him, so far as insurance sector is concerned, the term "investment" has wider amplitude and in the most comprehensive sense it includes loans also.

48. There cannot be any quarrel over the characteristics of the bonds discussed by the CIT(A), and also, there cannot be any quarrel over the wider amplitude of the term "investment" as explained by Mr. Kapila.

But the point which is missed by the Department is that interest-tax has to be levied only on loans and advances, and not on investments as a whole. Had that been the intention, it would not have been difficult to specify so in Section 2(7) of the Act. It could have easily said that "interest" means interest on investments as specified by the respective legislation (like the Banking Regulation Act or the Insurance Act). We do agree with Mr. Kapila that the term "investment" has wider amplitude. In fact, in our opinion, "investment" is the genus of which "loans and advances" is a specie. Interest-tax Act has sought to levy interest-tax only on one of the species, and of course, on two other items as included in the definition. We also do not dispute the fact that by investing in the bonds, a debtor-creditor relationship is created, but the intention of the credit institution is not as much to finance the borrower as much as it is to play in the market and earn quick profits. This is not so with regard to loans and advances. To invest in bonds is a strategy to profitably invest short-term surpluses in long term debt instruments and dispose them off when most profitable or when the risk perception is the least. Concepts like yield to maturity, duration (which is the weighted average of a run of cash flow during the tenure of a debt instrument), convexity (a curve drawn to show the relationship of movement of the bond price and its yield to maturity) etc. come into play while making decisions to invest in or off-load the bonds. Market volatility and price sensitivity have a direct bearing on such decisions. Hence, considering all these factors a bond portfolio is built up which will be subject to interest rate risk and default risk. Of course Government bonds are sovereign debts and hence have a zero default risk. We have taken a small dip in the vast ocean that the financial market is, to drive home the point that all the factors discussed above never come into play while advancing a loan to a party. And because of these unique market-oriented characteristics of bonds, debentures and Government securities, the major players of which are the credit institutions, legislature could never have intended to levy interest-tax on interest earned on these instruments. The intention is amply reflected in the speeches of the Finance Minister, both, while reviving the levy as well as while withdrawing the levy. The intention is to make credit constlier or cheaper as the case may be. When credit institutions play to the tune of market conditions in the money market, or vice versa, making or changing investment or disinvestment decisions by the minute, where does the intention of making credit cheaper or constlier lie in all this maze Earlier in this para we have mentioned that by investing in these instruments, without doubt, a debtor-creditor relationship is created. But this situation by itself cannot lead us to conclude that assessee has advanced loan to the issuer of the securities. In para 45 above, we have reproduced the meaning of the term "loan" as given in the Law Lexicon by P. Ramanatha Aiyar. It is explained that when a person deposits money in a bank, a debtor-creditor relationship is created, but the transactions cannot be regarded as a loan. Similar is the case of investment in debt instruments by the credit institutions.

Simply because a debtor-creditor relationship is created, it cannot be regarded as a loan transaction. Considering the distinct characteristics of the debt instruments, and considering the intention to make credit cheaper or costlier as the case may be, legislature never intended to levy interest-tax on interest earned on these instruments. The intention of the legislature is duly reflected in Section 2(7) of the Act by levying tax on only one of the several species of "investment".

49. In para 43 above. We have observed that when the term "means" is used while defining an expression, it gives a hard-and-fast meaning of the expression defined. By applying this principle of interpretation, in para 48 we made an attempt to interpret the main part of the definition of term "interest". We came to the irresistible conclusion that it means interest only on the loan segment of the investments and leaves out other segments of investments. However, the meaning is extended to two more items. The first item is commitment charges on unutilized portion of any credit sanctioned for being availed of in India. Once credit is sanctioned to a person, the amount sanctioned is kept available for use by the person, or, in other words the credit institution remains committed to the person to make the amount available as and when needed. On account of this commitment, the credit institution will not, to the extent of amount sanctioned invest the funds elsewhere. Hence, if the person in whose favour the credit is sanctioned, does not avail the credit, it would entail loss of interest to the credit institution. Generally, a charge is therefore, levied by credit institutions to partly set off this loss and such charge is known as commitment charge. Since such a charge is to partly compensate the loss of interest, and since such loss of interest is in connection with loans and advances, it assumes some colour of interest. Therefore, Section 2(7) extends the meaning of "interest" to commitment charges as well. This further proves that the intention of the legislature is to tax only that interest which is earned out of those transactions where the credit institution had the intention to actually finance the borrower.

50. The second item to which the definition is extended is discount on promissory notes and bills of exchange drawn or made in India. Discount here means the deduction made from the amount of a promissory note or a bill of exchange by one who gives value for it before it is due. Thus, such discount, in effect is nothing but rent for making available the money before it is due, The rent would normally cover interest for the period of the bill and some additional charges. The purchaser of the bill is the financier and recovers interest by discounting the bill.

Thus, our view expressed earlier gets stronger that tax under the Act is sought to be levied only where there is an intention to actually finance the borrower. One who gets the bill discounted is the borrower.

He avails of the finance and pays for it in the form of discount deducted by one who provides the finance. Because of its nomenclature, perhaps discount on promissory notes and bills of exchange may have escaped interest-tax, though, in essence it is interest earned on making finance available. Therefore, the meaning of the term "interest" is extended to discount on promissory notes and bills of exchange.

51. Much has been argued on the definition of the term "Government Security" as defined in Public Debt Act, 1944, For immediate reference, we reproduce the definition below : (a) a security, created and issued, by the Government for the purpose of raising a public loan, and having one of the following forms namely : (b) any other security created and issued by the Government in such form and for such of the purposes of this Act as may be prescribed." Particular stress was laid on the words "for the purpose of raising a public "loan". The emphasis was that since the purpose of creating and issuing a security is to raise a public loan, any interest arising out of interest in such security would be covered under Section 2(7) of the Act. Mr. Kapila had particularly drawn our attention to item (ii) in Clause (a) above, i.e., promissory note and had taken us through the Negotiable Instruments Act, in detail to explain the essential requisites of a promissory note. There cannot be any dispute on what he said about the characteristics of a promissory note and that a Government promissory note also possesses those characteristics.

52. However, what Mr. Kapila has missed is the definition of the term "Promissory Note" given in Section 2(3) of the Public Debt Act. It is as follows : It is no doubt an inclusive definition but specifically includes a treasury bill.

Earlier, we noted that the meaning of the term "interest" is extended to include discount on promissory note. Hence, ordinarily, discount on treasury bills would also be deemed to have been included in the meaning of the term "interest". But then, Sub-clause (ii) of Clause (b) in Section 2(7) specifically excludes discount on treasury bills. Now what are treasury bills? As per Law Lexicon by P. Ramanatha Aiyar, they are "Negotiable Government acknowledgements of loans made payable after a fixed period". Thus, the definition takes out of its sweep all Government securities.

53. Much has been argued on the last limb of the definition. The earlier definition specifically excluded interest chargeable under the head "Interest on securities" under the Income-tax Act. In the amended definition, this specific exclusion did not find place after the expression "but does not include.......". Hence, it was argued on behalf of the Revenue that since the earlier exclusion is specifically removed, interest on securities gets automatically included in the definition of the term "interest". We are unable to agree to this contention for the reasons that follow.

54. Firstly, if it was the intention of the legislature to include interest on securities, while amending the definition in 1991, it could have specifically included it in the upper portion of the definition when commitment charges and discount on promissory notes were specifically included. Hence, legislature was conscious that interest on securities has not be to be taxed under the Act. Only interest on loans made with the sole purpose of financing the borrower is to be taxed. Earlier, we have discussed in detail that this activity of financing the borrower is distinct from investing in securities where yield and capital appreciation is an important consideration. This gets confirmed from the Memorandum explaining the provisions which is reported in (1991) 190 ITR 317 (St) wherein it is mentioned that "As an anti-inflationary measure, the Bill seeks to revive the levy of interest-tax....." We fail to understand that when the main purpose of investing in the securities is to play in money market, how levying tax on such interest would act as an anti-inflationary measure. It also gets confirmed in the speech of the Hon'ble Finance Minister [(1991) 190 ITR (St) 114] wherein he mentions that the levy of interest-tax will have both monetary and fiscal impact. By taxing interest on securities, we do not fell that this objective can be achieved.

55. Secondly, the following observations of the Hon'ble Finance Minister in his speech are relevant : "I am enlarging, slightly, the coverage of this tax. The new tax will be levied on the gross amount of interest received by all banks, financial institutions and non-banking financial companies in the corporate sector on loans and advances made in India." From the above, it is clear, as argued by Mr. Pardiwalla, that the enlargement of the levy was with reference to only bringing in more entities within the tax net and not with reference to enlarging the scope of the levy.

56. Thirdly, and to our mind, most importantly, the following observations of the Finance Minister are very pertinent.

"These institutions would reimburse themselves by making necessary adjustments in the interest rates charged from borrowers. The proposed tax is expected to raise the cost of borrowing and yield revenue to the Government".

It is common knowledge that rates of interest on securities cannot be varied by the investor. The provisions have to be interpreted in a manner which will advance the object of the legislature. As mentioned in para 54 above, the levy is expected to have a monetary impact. It is only by making credit costlier, its flow in the market can be restricted and have the desired monetary impact. A similar impact cannot be achieved by taxing interest on securities. Further, the fiscal impact sought to be achieved by the levy is by way of collection of interest-tax revenues. On the other hand, if interest on Government securities is to be taxed, it will have an adverse impact on the fiscal aspect. This is because, the credit institution cannot vary the rate of interest on securities and hence the tax burden will fall on the credit institution itself. This will make investment in Government securities an unattractive proposition and adversely affect the Government's own borrowing programmes. This will obviously be counter-productive as it will have serious fiscal implications. It may be argued that, well, the above view may hold good for Government securities, but not for non-governmental bonds and debentures. In our opinion, by subscribing to such bonds and debentures, it does not affect the money market at all. The legislature was aware of all these economic considerations and, therefore, consciously did not include interest on securities while amending the definition in 1991. When the main definition does not include interest on securities, merely because the specific exclusion is deleted, its automatic inclusion in the main definition cannot be inferred. There is no scope for any intendment. This view of ours gets fortified by the following observations of the Bangalore Bench of the Tribunal in the case of Canara Bank v. Dy. CIT in Interest-tax appeal Nos. 5, 6, 7 and 8/Bang/97, dt. 16th Sept., 1997, We reproduce the relevant para 12(i) of the order : "For the foregoing, we have to hold that though interest on securities' has not been specifically excluded from the purview of the Interest-tax Act (No. 45/1974), there is no circumstance available to hold that interest on securities is intended to be taxed under the provisions of the Interest-tax Act (45/1974) as amended by Finance Act, 1992. As stated earlier, exclusion of interest on securities from the taxability to interest-tax Act led to ambiguity. Hence, the speech of the Finance Minster, at the time of re-introducing the Interest-tax Act, in the year 1991, by amending Act No. 45/74 by Finance Act, 1992, can be relied on to clarify the position. If the legislature intended to include the interest on securities chargeable to tax under the Interest-tax Act, there was no difficulty for it to have used the expression 'including the interest on securities' within the ambit of Section 2(7) of the Interest-tax Act. From the speech of the Finance Minister on 1st Nov., 1991, while re-introducing the Interest-tax Act, it is clear that he intended to extend the number of institutions and his intention was not to include the "interest' on securities" under the provisions of the Interest-tax Act." (1) Both the decisions of the Supreme Court, viz., Mahalakshmi Oil Mills (supra relied upon by the assessee), and P. Kasilingam (supra relied upon by the Revenue) lay down the same principles as regards the meaning of the expression "means and includes". In both the decisions, it is held that a thing which is not specifically included in the definition using the said expression has to be excluded from the purview of the definition.

(2) Making of loans and advances is, distinct from investment in securities. The title "Investment, Loans and Management" to Sections 27 to 32A of the Insurance Act, 1938 also suggests so.

(3) "Investment" generally does mean laying out of funds with a view to cam profits. Investment may assume several forms including making of. loans and advances, investment in securities, etc. Interest-tax is sought to be levied only on interest earned on one of the forms of investment and that is, loans and advances; (4) While arriving at the above conclusion, we have interpreted the definition of the term "interest" in Section 2(7) of the Act, keeping in view the following : (a) Rules of interpretation as enunciated by the Hon'ble Supreme Court; (b) Meaning of "loans and advances" and "securities" as understood in the commercial sense; (c) The definitions of "Government securities" and "promissory note" as defined in Public Debt Act, 1944; (5) We have also considered the commercial aspects that guide the investor in making investment decisions.

58. We reiterate that deletion of specific exclusion of interest on securities was merely to remove the ambiguity and also because the head "Interest on Securities" had since been deleted in the Interest-tax Act. The insertion of the definition of the term "Interest on Securities" in Section 2(28B) of the IT Act, 1961, has no impact here.

Had it been the intention of the legislature to tax such interest, it would have easily included it in Section 2(7) of the Act by saying : "Interest" means interest on loans and advances made in India and includes : (c) Interest on securities as defined in Sub-section (28B) of Section 2 of the IT Act......" 59. Finally, we hold that interest on debentures, bonds and Government securities is not chargeable to tax under the Interest-tax Act, 1974, and hence addition thereof in total chargeable interest is deleted for all the years under consideration.

60. Before parting, we put on record our appreciation for the erudite arguments advanced by Mr. S.D. Kapila and Mr. D.J. Tralshawala on behalf of the Department, and by Mr. P.J. Pardiwalla, the learned counsel for the assessee.


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