2008 (10) TMI 13 - SC - Income Tax

Whether interest earned by the assessee bank on government securities was liable to be assessed u/s 2(7) of the Interest Act revenue contend that ITAT & HC were not justified in holding that loans & advances don t include interest on securities, bonds, debentures & therefore not liable to tax - there is a difference between loans and advances & investments/securities - matter remanded to ITAT to examine the factual position as to whether the interest involved is on government securities only

Summary

Issues:
Challenge to judgment of final order passed by Bombay High Court regarding assessment of interest earned by assessee bank on government securities under Income Tax Act and Interest Tax Act.

Analysis:
The main issue in this case was whether the interest earned by the assessee bank on government securities was liable to be assessed under Section 2(7) of the Interest Tax Act. The Income Tax Appellate Tribunal initially held that the interest was not chargeable. The High Court upheld this view, leading to the revenue filing appeals against the judgment. The appellant argued that interest on securities falls within the meaning of "Interest chargeable to tax" as defined under Section 2(7) of the Interest Act. On the other hand, the respondent assessee-Bank supported the judgment of the Tribunal as upheld by the High Court.

A similar question had been considered by the Supreme Court in a previous case involving Corporation Bank. The Court in that case highlighted a basic difference between loans and advances on one hand, and investments/securities on the other. The Court referred to provisions of the Income Tax Act, the Companies Act, and the Bank Regulation Act to support this distinction. The Court also cited two decisions of the Bombay High Court which had been accepted by the revenue. Based on these considerations, the Supreme Court dismissed the civil appeals filed by the department in the Corporation Bank case.

In the present case, the appellant argued that the decision in the Corporation Bank case related to interest on government securities, while the interest earned in this case was also on government securities. However, this stand was denied by the appellant's counsel. The Court directed the Tribunal to examine the factual position to determine whether the interest involved in the present case was solely on government securities. The application of the Corporation Bank case's ratio would depend on this factual determination.

Ultimately, the appeals were disposed of accordingly, with the Court emphasizing the importance of factual findings regarding the nature of the interest earned in the present case to apply the relevant legal principles established in previous judgments.