2002 (12) TMI 72 - HC - Income Tax

Interest-Tax Act - Charge Of Tax, - Whether interest on debentures, bonds and securities is taxable under section 5 of the Interest-tax Act, 1974? - Whether the Commissioner of Income-tax (revisional authority under section 20 of the Interest-tax Act) was right in rejecting the revision application of the petitioner on the ground of non-maintainability?

Summary

Issues Involved:
1. Taxability of interest on debentures, bonds, and securities under section 5 of the Interest-tax Act, 1974.
2. Difference between lending and investing.
3. Applicability of section 2(7) of the Interest-tax Act to interest on Dated Government Securities.
4. Jurisdictional issue regarding the revisional authority's decision under section 20 of the Interest-tax Act.

Detailed Analysis:

1. Taxability of Interest on Debentures, Bonds, and Securities:
The primary issue was whether interest on debentures, bonds, and securities is taxable under section 5 of the Interest-tax Act, 1974. The petitioner argued that such interest should not be taxable as it does not fall under "interest on loans and advances" as defined in section 2(7) of the Act. The court examined the legislative intent and the scheme of the Act, concluding that the interest received from the RBI on Dated Government Securities does not fall within the definition of "interest" under section 2(7) of the Interest-tax Act.

2. Difference Between Lending and Investing:
The petitioner contended that there is a fundamental difference between lending and investing. They argued that subscribing to Dated Government Securities is an investment and not a loan to the Government. The court agreed, noting that loans and advances are distinct from investments in both commercial and accounting senses, as well as under various statutory provisions like sections 370 and 372 of the Companies Act and section 29 of the Banking Regulation Act, 1949.

3. Applicability of Section 2(7) of the Interest-tax Act:
The court analyzed section 2(7) of the Interest-tax Act, which defines "interest" to mean "interest on loans and advances." The court found that this definition does not include interest on Dated Government Securities. The removal of the exclusionary clause by the Finance (No. 2) Act of 1991 did not change this interpretation, as the exclusionary clause was deemed clarificatory in nature. The court held that interest received from the RBI on Dated Government Securities is not taxable under section 2(7).

4. Jurisdictional Issue Regarding the Revisional Authority's Decision:
The revisional authority had rejected the petitioner's revision application on the grounds that new claims cannot be raised for the first time under section 20 of the Act. The court found this view erroneous, stating that the issue raised by the petitioner concerned the lack of authority or jurisdiction of the Assessing Officer to levy tax on the interest received from the RBI on Dated Government Securities. Therefore, this issue was entertainable under section 20 of the Interest-tax Act.

Conclusion:
The court allowed the petition, holding that the interest received from the RBI on Dated Government Securities amounting to Rs. 15,69,41,050 is not taxable under section 2(7) of the Interest-tax Act. The revisional authority's decision was set aside, and the court clarified that its judgment applies only to the interest received from the RBI on the Dated Government Securities held by the petitioner on the coupon date, not to the interest earned from trading these securities with other institutions. The petition was allowed in terms of prayer clause (b), with no order as to costs.