2008 (2) TMI 415 - HC - Indian Laws

Tax on Interest on securities as per the provisions of the Interest-tax Act, 1974 held that - that there is a basic difference between loans and advances on the one hand and investment/securities on the other hand. This difference is indicated in the Income-tax Act, the Companies Act as well as the Banking Regulation Act - interest earned by the banks on dated Government securities is not liable to interest-tax under section 2(7) read with section 4 of the Interest Act, 1974 - question of law as formulated in the appeal has to be answered in favour of the assessee and against the Revenue

Summary

Issues:
1. Interpretation of the provisions of the Interest-tax Act regarding the chargeability of interest on securities for a banking company.

Analysis:
The High Court judgment involved an appeal by the Revenue against the Income-tax Appellate Tribunal's order concerning the chargeability of interest on securities for a banking company under the Interest-tax Act. The Assessing Officer had initially held that exemption for banking companies from interest-tax on income earned from interest on securities was not applicable for the relevant year, thus requiring the interest on securities to be taxed. The Commissioner of Income-tax (Appeals) and the Tribunal concurred with this view. However, the Tribunal, considering various aspects, allowed the appeal of the assessee, concluding that interest on securities could not be taxed under the Act.

The High Court noted that the Tribunal had disposed of three appeals for different assessment years together, and two appeals had already been decided earlier. The Division Bench of the High Court had previously relied on a Supreme Court judgment in CIT v. Corporation Bank [2007] 295 ITR 193 (SC), which highlighted the distinction between loans/advances and investments/securities in various statutes. The Supreme Court held that interest earned by banks on dated Government securities was not liable to interest-tax under the Interest-tax Act. The High Court, in line with the Supreme Court's reasoning and previous decisions of the Bombay High Court, concluded that the interest on securities in this case was not chargeable under the Act.

Therefore, the High Court, based on the precedent set by the Supreme Court and considering the specific provisions of relevant statutes, ruled in favor of the assessee and against the Revenue, holding that the interest on securities for the banking company was not chargeable under the Interest-tax Act. As a result, the appeal was disposed of in favor of the assessee.