2002 (12) TMI 73 - HC - Income Tax

Interest Tax Act, 1974 - Charge Of Tax - Whether, the Tribunal was justified in holding that loans and advances do not include interest on securities, bonds and debentures and, therefore, not liable to tax under the provisions of the Interest-tax Act when the interest on securities fall within the meaning of interest chargeable to tax as defined under section 2(7) of the Interest-tax Act, 1974. Moreover, requirements of tax deduction at source from interest on securities as per section 193 of the Income-tax Act makes it clear that interest on securities is chargeable to tax under the Interest-tax Act, 1974 - we answer the above question in the affirmative, i.e., in favour of the assessee and against the Department. Accordingly, the appeals are dismissed

Summary

Issues:
Interpretation of the term "loans and advances" under the Interest-tax Act for the assessment year 1993-94.

Analysis:
The judgment by the High Court of Bombay delves into the question of law raised by the Department regarding the taxability of interest on securities, bonds, and debentures under the Interest-tax Act. The court examined whether the interest on securities falls within the definition of 'interest chargeable to tax' as per section 2(7) of the Interest-tax Act, and if the tax deduction at source from interest on securities under section 193 of the Income-tax Act implies that interest on securities is taxable under the Interest-tax Act as well.

The court analyzed the facts of the case involving United Western Bank Limited, which had filed its return of chargeable interest, including interest on investments and securities, incidents on interest-tax, and interest on advances/bills. The Assessing Officer assessed the chargeable interest, including interest on securities, leading to an appeal by the bank. The Commissioner of Income-tax (Appeals) rejected the appeal, stating that post-1991, interest on securities was intended to be taxed under the Interest-tax Act. The Tribunal, however, following a judgment by the Madras High Court, ruled in favor of the bank, prompting the Department to appeal.

The arguments presented by both parties focused on the interpretation of the term "loans and advances" under the Interest-tax Act. The Department contended that interest on securities should be taxable under the Act, as indicated by the deletion of the exclusionary clause post-1991. On the other hand, the assessee-banks argued that there was a clear distinction between investments and advances under the Banking Regulation Act, with securities not considered stock-in-trade. They emphasized that the Act aimed to tax interest on loans and advances, not investments, to discourage borrowings.

The court's findings drew parallels with a Supreme Court judgment regarding the deletion of exclusionary clauses, indicating that such deletions do not alter the main sections of the Act. It highlighted the anti-inflationary purpose of the Interest-tax Act and the distinction between loans and investments in commercial and accounting contexts. The court concluded that interest received by assessee-banks on securities under the category "permanent" should not be subject to the Interest-tax Act, aligning with the interpretation of the term "loans and advances."

In the final order, the court answered the question in favor of the assessee, dismissing the appeals with no costs, and providing a detailed analysis of the distinction between investments and advances under the Banking Regulation Act and the Companies Act for clarity in interpretation.

This comprehensive analysis of the judgment showcases the meticulous examination of legal provisions and precedents to arrive at a well-reasoned decision on the taxability of interest on securities under the Interest-tax Act for the relevant assessment year.