2019 (3) TMI 60 - HC - Income Tax

Liability to interest tax on interest on debentures - Interest Tax Act, 1974 - HELD THAT - The issue stands covered in favour of the assessee and against the Revenue by a decision of Commissioner of Income Tax v. Gujarat Industrial Investment Corporation 2016 (10) TMI 54 - SUPREME COURT found on a reading of the definition of interest as contained in Section 2(7) of the Interest Tax Act, 1974 that the Act would have no application to interest on debentures. We hence answer the said question in favour of the assessee and against the Revenue. Liability to pay interest tax on the interest received on a loan made to a broker - assessee being a company engaged in the purchase and sale of securities - HELD THAT - There being no trading activity between the assessee and the broker, it cannot be said to be a trading advance. The advance was made for making investments and after such investments were made what was retained with the broker was levied with interest by the assessee thus giving it the character of a loan. The assessee s intention at the time of advance is not at all relevant, since the character of the amounts retained with the share broker underwent a change, insofar as the levy made for interest. It is also clear that the amount remained with the broker for one year and hence the receipt of ₹ 1,80,000/- as interest on a loan of ₹ 10 lakhs @ 18% p.a. - Decided in favour of the Revenue and against the assessee.

Summary

Issues:
1. Liability of the assessee to interest tax on interest on debentures.
2. Liability of the assessee to pay interest tax on the interest received on a loan made to a broker.

Analysis:

Issue 1: Liability of the assessee to interest tax on interest on debentures
The primary issue in this appeal was the liability of the assessee to interest tax on interest on debentures. The court referred to a decision of the Supreme Court in Commissioner of Income Tax v. Gujarat Industrial Investment Corporation, where it was held that the Interest Tax Act would not apply to interest on debentures. The court upheld this decision and ruled in favor of the assessee, thereby rejecting the Revenue's claim for interest tax on interest from debentures.

Issue 2: Liability of the assessee to pay interest tax on the interest received on a loan made to a broker
The second question revolved around whether the assessee was liable to pay interest tax on the interest received on a loan made to a broker for stock market investments. The assessee had advanced an amount to the broker for investment purposes, and interest was charged on the remaining balance. The Government contended that the interest liability fell under a specific clause of the Act, while the assessee argued that the advance was solely for investment purposes. The court analyzed a similar case from the Madras High Court where a trading advance was distinguished from a loan. In this case, the court found that there was no trading activity between the assessee and the broker, and the advance was solely for investment purposes. As the amount retained with the broker was levied with interest, it was deemed a loan, resulting in the court ruling in favor of the Revenue and against the assessee.

In conclusion, the court partially allowed the appeal, upholding the decision in favor of the assessee regarding interest on debentures but ruling in favor of the Revenue regarding the interest received on a loan made to a broker. The parties were left to bear their respective costs.