2008 (3) TMI 305 - HC - Income Tax

Whether interest earned by Banks on Govternment securities is chargeable to tax under the Interest-tax Act, 1974 deletion of exclusion clause in S. 2(7) - that interest on securities of the Government, whatever be the nature of security, cannot be treated as a loan or advance and consequently interest from security cannot be assessed under the Interest-tax Act - Tribunal is right holding that interest-tax is not payable under the Interest-tax Act, 1974, as amended by the Finance (No. 2) Act of 1991, on interest on Government securities received by the respondent-banks

Summary

Issues:
Interpretation of the Interest-tax Act, 1974 and its amendment in 1991 regarding the taxability of interest on Government securities.

Analysis:
The High Court of Kerala heard appeals filed by the Revenue challenging the Tribunal's order stating that interest-tax is not payable on interest from Government securities. The central issue was whether interest on securities is taxable under the Interest-tax Act, 1974, post its amendment in 1991. The amendment removed the exclusion of interest on securities from the definition of "interest." The court examined the definitions before and after the amendment to determine the scope of taxable interest. The original definition excluded interest on securities, while the amended version included specific exclusions like interest under the Reserve Bank of India Act and discount on treasury bills.

The Revenue argued that post the 1991 amendment, interest on securities falls within the definition of taxable "interest." However, the assessees contended that only interest on "loans and advances" is taxable under the Act, citing precedents from various High Courts and the Supreme Court. They emphasized that the nature of Government securities, whether permanent or current, should not affect the taxability under the Act. The court agreed with the assessees, stating that interest from Government securities, regardless of their nature, does not qualify as "loans and advances" under the Act for taxation.

The Revenue highlighted the 1993 amendment deleting the exclusion clause for "interest on securities," arguing it aimed to tax interest income from securities. However, the court disagreed, noting that the deletion was to align with changes in the Income-tax Act and did not introduce tax on Government securities' income. Relying on Bombay High Court decisions, the court held that the 1991 amendment did not intend to tax interest from Government securities, which do not fall under the Act's definition of taxable interest. The court emphasized that if the Legislature intended to tax interest from securities, they would have explicitly stated so. Therefore, the court dismissed all appeals filed by the Revenue, affirming that interest on Government securities is not taxable under the Interest-tax Act.