1. This Revenue's appeal and assessee's cross-objection are directed against CIT(A)'s order dt. 22nd July, 1997 and in the matter of assessment under Section 143(3) of the IT Act, 1961 (hereinafter referred to as 'the Act') for the asst. yr. 1994-95. As a matter of convenience, therefore, the appeal and cross-objection are being disposed of by way of this consolidated order.
3. In this appeal, filed by the Revenue, solitary grievance raised is as follows: "On the facts and circumstances of the case and in law, the learned CIT(A) has erred in directing the AO to delete the addition of Rs. 6,51,22,058 made on account of interest on Government securities and IRFC bonds." 4. Learned counsel for the assessee has invited our attention to Tribunal's order dt. 22nd Nov., 2002 passed in assessee's own case for the asst. yr. 1992-93, on a perusal of which we find that the aforesaid order squarely covers the above issue in favour of the assessee, Learned counsel has also invited our attention to the orders passed by the Co-ordinate Benches, i.e., in the case of Mashreq Bank v. Dy. CIT (ITA No. 3/Mum/1996; order dt. 8th Aug., 2002, Asst. yr. 1992-93) and Dy. CIT v. American Express Bank Ltd. (ITA No. 56/Mum/1996; order dt.
16th Oct., 2002, Asst. yr. 1992-93) in the case of Oman International Bank v. Dy. CIT (ITA No. 12/Mum/1996; Asst. yr. 1992-93, dt. 20th Nov., 2002), wherein identical views have been taken. Both the parties agree that the Revenue's ground of appeal is covered by the aforesaid decisions, though learned Departmental Representative dutifully relied upon the order of the AO.5. We see no reasons to take any other view of the matter than the view taken, in the orders referred to above, by the Co-ordinate Benches of this Tribunal. Respectfully following the views so taken by the Co-ordinate Benches, with which we are in most respectful agreement, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.
7. We now move on to assessee's cross-objection, i.e., CO No.84/Mum/1999.
8. Learned counsel fairly accepts that ground Nos. 1 and 2 of cross-objection merely support the order of the CIT(A) and, accordingly, do not call for any independent adjudication. Accordingly, we dismiss ground Nos. 1 and 2 as infructuous.
10. Ground No. 3, which is the only ground pressed before us, is as follows: "3. The respondent submits that income of Rs. 1,07,11,877 on commercial paper ought to be treated as not exigible to interest tax. A transaction in CP purchase does not create the same relationship between the purchaser and the issuer as in the case of a loan transaction between the lender and the borrower. As such, such transaction constitutes investment and not 'loans and advances', In substance, thus, assessee's grievance is that the CIT(A) erred in holding that the income of Rs. 1,07,11,877 on commercial paper is exigible to interest tax.
11. During the course of assessment proceedings, the assessee claimed that its income earned by way of discount on commercial paper is not exigible to interest tax as transaction of commercial paper does not create the same relationship between the purchaser and the issuer, as in the case of loan transactions between a lender and borrower. It was thus submitted that purchase of commercial papers is in the nature of making investments and not in the nature of making loans and advances.
The AO, however, was not impressed with these arguments and he concluded that the essence of purchase of commercial paper is of a short-term loan given by the bank. He further observed that merely because the commercial paper is transferable in nature does not mean that the discount earned thereon cannot be brought to tax under the Interest-tax Act. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) observed that under Section 2(7) of the Interest-tax Act, 'interest' means interest on loans and advances made in India and includes inter alia 'discount on promissory notes and bills of exchange drawn in India'. He then took note of RBI Notification No. IECD. 1/87(CP)-89/90 dt. 11th Dec., 1989 which indicates that the commercial papers shall be in the form of usance, promissory note, negotiable by endorsement and delivery as per the form specified in Schedule I thereto and issued at such discount to face value as may be determined by the company issuing the commercial paper. It was in this backdrop that the CIT(A) concluded that "since commercial paper is equated with a promissory note, which falls within the ambit of Section 2(7) of the Interest-tax Act, the return coming out of commercial papers has to be subjected to interest-tax." 13. Shri Sonde, learned advocate, appeared for the assessee, and Shri Bains, learned Departmental Representative, appeared for the Revenue.
Learned Representatives have been heard, material before us perused and the factual matrix of the case as also the applicable legal position deliberated upon.
14. We find that Section 2(7) of the Interest-tax Act, 1974 defines interest as "interest on loans and advances made in India and includes-- (a) commitment charges on unutilised portion of any credit sanctioned for being availed of 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); A plain reading of this section makes it clear that in order to bring an interest receipt within meaning of Section 2(7) it is sine qua non that the same should constitute 'interest on loans and advances' though it will also include in its ambit the commitment charges on unutilised portion of credit sanctioned for being availed in India as also the discount on promissory notes and bills of exchange drawn or made in India. Various Co-ordinate Benches of this Tribunal, such as in the reported cases of Karnataka Bank Ltd. v. Dy. CIT (1998) 60 TTJ (Bang) 103 : (1998) 97 Taxman 187 (Bang)(Mag), Life Insurance Corp. of India v. Jt. CIT (2002) 74 TTJ (Bom) 624 : (2002) 82 ITD 749 (Bom), ANZ Grindlays Bank v. Dy. CIT (2003) 79 TTJ (Del) 475, Punjab National Bank v. Dy. CIT (2003) 79 TTJ (Del) 454 and Sahara India Savings & Investment Corporation Ltd v. Asstt. CIT (2001) 73 TTJ (All) 930 : (2001) 79 ITD 56 (All), have consistently taken the view that interest on debentures will however not be covered by Section 2(7) of the Act and, accordingly, not be exigible to interest-tax. In coming to this conclusion various Benches of the Tribunal have taken the view that the connotations of the expression 'loans and advances' are different from connotations of the term 'securities' and that 'securities' are investments whereas 'loans and advances' do not fall in that category.
In the case, of ANZ Grindlays Bank v. Dy. CIT (supra), Tribunal took note of the position, as evident from the statutory provision, from Finance Minister's speech and RBI circular to the scheduled banks, that the incidence of interest-tax was not to be borne by the bank but was to be passed on to the borrowers which was not possible in case the same is held to be applicable to the securities such as debentures and like. In the case of Punjab National Bank v. Dy. CIT (supra), the Tribunal after having taken note of the provision of Sub-section (28B) of Section 2 which defines interest on securities including inter alia 'interest on debentures or other securities for money issued by' amongst others 'a company', concluded that since interest on debentures is nothing but interest on securities which is different from loans and advances, the same cannot be exigible to interest tax.
15. It would thus follow that whether or not the discount on commercial paper can be subjected to interest-tax, would depend on whether the discount on commercial paper is covered by the definition of 'interest on securities' under Section 2(28B) of the IT Act. In case, it is covered by the same, following the view taken by a Co-ordinate Bench in the case of Punjab National Bank v. Dy. CIT (supra), it 'cannot be treated as part of interest on loans and advances'.
16. A perusal of Non-Banking Companies (Acceptance of Deposits through Commercial Paper) Directions 1989, a copy of which was placed before us, reveals that the object of Central Government's exempting the acceptance of deposits by issuance of 'commercial paper' was (a) to allow highly rated corporate borrowers to diversify their sources of short-term borrowings, and (b) provide an alternative financial instrument to investors. These directions further provide that the 'commercial paper' shall only be issued for maturities between three months and less than one year from the date of the issue. As regards mode of issue and discount rate, it is provided that 'the commercial paper shall be in the form of usance promissory note negotiable by endorsement and delivery, as per the form specified in Schedule I hereto and be issued at such discount to the face value as may be determined by the company issuing the commercial paper'. It would thus follow that a 'commercial paper' is a kind of financial instrument to the investors which is issued in the form of 'usance promissory note transferable by endorsement and delivery'. The thrust of the arrangement is in the nature of issuance of a security and not of raising a loan. It is well settled that unless the arrangement is in the nature of a loan or advance, mere fact that a security is issued in the form of a promissory note or bill of exchange will not ipso facto bring the interest thereon in the ambit of Section 2(7) of the Act. If that was a reason enough for coverage by Section 2(7), the interest on debentures, which are also admittedly in the nature of a usance promissory note, could not have been treated as not exigible to interest tax. In fact, commercial paper is more akin to a debenture which is for a fixed term and, as rightly pointed by the learned counsel for the assessee, does not give rise to the same relationship as that of a lender and a borrower. The very fact that the term used, in the Non-banking Companies (Acceptance of Deposits through Commercial Paper) Directions 1989, for persons to whom the commercial papers are issued is 'investor' rather than 'lender' or 'financer' would also indicate that the nature of arrangement is of subscribing to a financial instrument and not making an advance or giving a loan.
Keeping all these factors in mind, we are of the considered view that the commercial paper is in the nature of a security issued by a company and discount thereon is in the nature of interest on a security issued by a company which, in turn, will cover it by 'interest on securities' under Section 2(28B) and thereby take it outside the ambit of interest on loans and advances, as is the view of several Co-ordinate Benches referred to earlier in the order. We also find that in the case of discount on commercial paper, it is not practicable that the interest-tax levy is passed on to the person raising funds through issuance of commercial paper and, therefore, following the rational in the case of ANZ Grindlays Bank v. Dy. CIT (supra), the same may not be exigible to interest-tax for this reason also.
17. Keeping all these factors in mind, as also entirety of the case and respectfully following ratio of decisions of the Co-ordinate Benches, we deem it fit and proper to hold that discount on commercial paper is not exigible to interest-tax as the same is in the nature of income from securities. Accordingly, we direct the AO to exclude the income on account of discount on commercial paper from the interest exigible to interest tax.
19. Ground No. 4 was not pressed before us. The same is, accordingly, dismissed as not pressed.
20. The cross-objection filed by the assessee is thus partly allowed in the terms indicated above.
21. To sum up, while Revenue's appeal is dismissed, the assessee's cross-objection is partly allowed.