1. In this appeal for AY 1995-96, the Department leads that the learned CIT (A) erred in concluding that interest tax cannot be levied on interest on debentures, bonds, etc. It is alleged that the learned CIT (A) has failed to appreciate that the definition of the term 'interest' under Section 2(7) of the Interest Tax Act, 1974 is an inclusive definition and includes interest received on any loans and advances made in India, excepting those loans which are specifically excluded from the provisions of Section 2(7). Since interest on debentures, bonds, etc. is not specifically excluded from the provisions of Section 2(7), it is liable to tax under Section 2(7) of the Interest Tax Act.
2. The assessee is a resident Indian Company. It filed its return of chargeable interest under Section 7(1) of the Interest Tax Act, on 29.12.1995. Chargeable interest was declared at Rs. 18.03,50,820/- The assessing officer found that while computing the chargeable interest, the assessee had considered interest on loans and advances on Rs. 18,03,50,820/- only. The interest earned on securities, bonds and debentures, amounting to Rs. 1.97,07,490/- had not been included. The assessee contended before the assessing officer that Section 2(7) of the Interest Tax Act defines 'interest' to mean interest on loans and advances made in India and that no mention is made of interest on securities in this inclusive definition. The assessing officer held that though the section gives an inclusive definition, it does not exclude interest on securities and bonds; that since the term 'loans and advances' has not been defined in the Act, it has to be understood in its natural meaning; that loans securities and bonds are nothing but instruments for making loans and advances; and that they are the description of an instrument, through which, debts are secured. The assessee's contention was rejected and interest of Rs. 1,97,07,480/- was brought to tax as per the stand taken by the Department in earlier years.
3. On appeal, the learned Commissioner (Appeals), vide his impugned order dated 10.02.1999, following the decision of the Hon'ble Madras High Court in the case of 'Lakshmi Vilas Bank Ltd.' 228 ITR 697 and that of the Bangalore Tribunal in 'Karnataka Bank Ltd.', 97 Taxman (Mag.) 187, held that if the legislature wanted to include interest on securities in the definition of interest, there would have been no difficulty for it to do so. Merely because it is omitted to be mentioned, it does not mean that the legislature wanted to include interest on securities within the purview of the Interest Tax Act. The CIT (A) thus held that the interest on securities, bonds and debentures, of Rs. 1,97,07,490/-, was not liable to be taxed under the provisions of the Interest Tax Act. Aggrieved, the Department has come up in appeal.
4. The Interest Tax Act, 1974 is an Act enacted to impose a special tax on interest in certain cases. As per Section 2(5) thereof chargeable interest" means the total amount of interest referred to in Section 5, computed in the manner laid down in Section 6. According to Section 2(7), "interest" means interest on loans and advances made in India and includes commitment charges on unutilized portion of any credit sanctioned for being availed of in India and discount on promissory notes and bills of exchange drawn or made in India, but does not include interest referred to in Section 42(1B) of the Reserve Bank of India Act, 1934 and discount on treasury bills. The Department avers that since interest on debentures, bonds etc., is not specifically excluded from the provisions of Section 2(7), it is liable to be taxed.
5. A perusal of section 5, which gives the scope of chargeable interest, shows that subject to the provisions of the Act, the chargeable interest of any previous year shall be the total amount of interest other than interest on loans and advances made to other credit institutions or to any co-operative society engaged in carrying on the business of banking according or arising in the year.
6. In 'CIT v. Lakshmi Vilas Bank Ltd.' (1997) 228 ITR 697, the Hon'ble Madras High Court held that the Interest Tax Act, 1974, is applicable only to the interest received by banks. Therefore, placing reliance on the provisions of the Banking Regulation Act, 1949, in the matter of understanding the meaning of the word "debenture" and in ascertaining the character of the interest received on debentures, would not be out of context. Banks are bound by the Banking Regulation Act, 1949, in the matter of maintaining the balance-sheet and in the balance-sheet, in accordance with Section 29 of the said Act, and the Third Schedule thereto, banking companies have to make investments to the prescribed percentage and enter the same under the head "Investments", even though (sic) are other heads in the balance-sheet like advances and loans, etc. 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.Under Section 2(7)(b)(i) any amount chargeable to income-tax, under the Income-tax Act, under the head "Interest on Securities" would not be included (sic) interest under the Interest-tax Act.
7. (sic) Bank Ltd. v. DCIT', (1998) 97 Taxman (Mag.) 187, the Bangalore Bench of the Tribunal has held that in the definition of 'interest' in the Interest-tax Act, the interest on securities is not specifically exempted. But if the words and phrases are not clear and definite, one has to go to the objects and reasons of the Act. The Finance Minister while introducing the Interest-tax Bill, has stated that he is enlarging the coverage of this tax and that 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 (sic) not stated specifically whether interest on securities was includible or not but had only stated in the corporate sector on loans and advances made in India." Therefore, if the Parliament wanted to include interest on securities in the definition of 'interest, there would have been no difficulty for them to do so.
Merely because it is omitted to be mentioned, it does not mean that the Parliament wanted to include interest on securities within the purview the Act. The expression 'means and includes' in the definition is exhaustive and not extensive, and the definition does not take in interest on securities also. The term 'loans and advances' is different from the term 'Securities'. Securities are investments, whereas loans and advances do not fall under that category. The word 'debenture' is also absent in the definition of 'interest' given in Section 2(7).
Therefore, as per the definition of 'interest' given in Section 2(7), interest on debentures as well as interest on securities are not included in the definition. Interest on loans and advances is different from interest on securities. Both the interest cannot be treated at par with each other. So, interest on securities is not liable to be taxed under the provisions of the Act.
8. The learned Commissioner (Appeals) relied on both the above decisions while allowing the assessee's appeal.
9. The learned Departmental Representative, Shri P.R. Sethi, in support of the assessment order, has placed reliance on the decision of the Hon'ble Bombay High Court in the case of 'Discount and Finance House of India Ltd. v. A.K. Bhardwaj, CIT and Ors.', (2003) 259 ITR 295. In this case, the assessee was a company incorporated under the Companies Act, 1956. It was promoted by the RBI, ICICI, UTI, SBI, IDBI, etc. It was an investment company as defined under Section 2(5B)(ii) of the Interest tax Act, 1974, as it then stood. It was a dealer in money market instruments such as call/notice/term money, treasury bills, commercial paper, certificate of deposit and Government Dated Securities. The assessee subscribed to, bought, stocked and traded in Dated Securities.
The assessee subscribed to bought, stocked and traded in Dated Government Securities regularly. At the end of the year, the assessee showed the Government Dated Securities accounts under the head "Current Assets" as stock in hand. The profits on sale of Government Dated Securities as well as interest earned on the Government Dated Securities were shown as business income and assessed under the Income-tax Act. As a credit institution, the assessee filed its return of chargeable interest for the year ending March, 31, 1994, relevant to the assessment year 1994-95. The return was filed on December, 5, 1994, returning a total chargeable interest at Rs. 2.483 lakhs approximately.
The said interest included interest of Rs. 15.69 lakhs received from the RBI during the financial year 1993-94 on Government Dated Securities directly subscribed by the assessee at the time of its initial issue by the Government. The assessment was under Section 8(2).
However, assessee came across a Circular issued by the RBI under which it was clarified that interest earned on Government Securities does not (sic) to interest within the meaning under Section 2(7). The assessee filed a Revision Petition Under Section 20 of Interest-tax Act 1974, contending that the Government Dated Securities held by it did not represent moneys lent to the Government and, therefore, interest earned on such Dated Government Securities was not in the nature of interest on loan and thus, such interest was not chargeable to tax Under Section 4. The Revisional authority reviewed the petition. On a writ petition, the Hon'ble Bombay High Court held that Interest Tax was not leviable on the interest received from the RBI on the Dated Government Securities and, secondly, the issue raised concerned lack of authority jurisdiction on the part of the assessing officer under the Interest-tax Act to levy tax on such interest. Therefore, such an issue had to be tested by the Commissioner of Income-tax under his revisional Jurisdiction; and that the Revenue was not entitled to levy interest tax on Rs. 1,56,94,1,050 received from the RBI during the year 1993-94 on Dated Government Securities as which would mean levy of tax indirectly on the RBI Under Section 26C. It was especially made clear that the judgment applied only to interest paid by the RBI to the assesses its holding the Dated Government Securities in SGL account with RBI.10. The above last sentence itself makes it clear that the judgment of the Hon'ble Bombay High Court is applicable only to the assessee in that case and only to the interest paid to the RBI to that assessee on its holding the Dated Government Securities in SGL account with the RBI. That being so, we agree with the contention of the 1d. AR of the assessee that this judgment is inapplicable to the facts of the present case.
11. On the other hand, assessee has relied on decision of the Mumbai Tribunal in the case of Life Insurance Corporation of India v. Jt.
Commissioner of Interest-tax "The assessee-corporation, in its returns for the assessment years under consideration, had shown chargeable interest which did not include interest on Government of India securities, debentures and bonds. The assessee claimed that such interest could not be classified as interest on loans and advances under Section 2(7). The Assessing Officer held that from the standpoint of the entity which issued the debenture or bond, money received represented a borrowing and, therefore, amount paid towards the same constituted loan and advance. Similarly, he held that investment made by the assessee could also be regarded as loan or advance and, thus, interest on debentures, bonds and securities was liable to interest-tax. On appeal, the Commissioner (Appeals) observed that the term 'loans and advances' includes debentures, bonds and Government securities and as such interest on these is chargeable to interest-tax." "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, the Legislature was conscious that interest on securities has not to be taxed under the Act. Only interest on loans made with the sole purpose of financing the borrower is to be taxed.
Secondly, 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.
Thirdly, and most importantly, 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. 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 counterproductive as it will have serious fiscal implications. It may be argued that the above view may hold good for Government securities, but not for non-governmental bonds and debentures. However, 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 the securities while amending 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 (sic). The (sic) of specific exclusion of interest on securities is merely to remove the ambiguity and also because the head 'Interest on securities' has since been deleted in the Income-tax Act. The insertion of the definition of the term 'interest on securities' in Section 2(28B) of the Income-tax Act, has no impact in the instant case.
Therefore, the interest on debentures, bonds and Government securities cannot be said to be chargeable to tax under the Act.
Hence, addition thereof in total chargeable interest was to be deleted." 13. Therefore, it is evident and well supported by judicial precedent that interest tax cannot be levied on interest on debentures, bonds etc. The order of Learned Commissioner (Appeals) is well reasoned. It does not require any interference at our hand. It is upheld.