2004 (6) TMI 244 - AT - Income Tax

Charging of interest tax on interest from inter-corporate deposits - Applicability of the definition of interest u/s 2(7) Interest tax act - Distinction between Loan and Deposit - HELD THAT - The definition of the word interest as contained under section 2(7) has been already reproduced above. For the purposes of the Interest Tax Act interest means interest on loans and advances made in India. The definition further goes to say that it includes certain items but does not include certain other items. There is no other provision in the Interest Tax Act which refers to deposit in contra-distinction to loan or advance . Interest on deposit is not specifically excluded from the definition u/s 2(7). Interest on loans as well as advance is chargeable to interest tax. The word advance has wide connotations and it means any money advanced to any person. In the present case the assessee company has advanced moneys by way of interest earning deposits to other companies for a fixed term on which interest income is earned. Such deposits have not been made in response to any invitation to make such deposits by the other companies. The transactions have been finalized through brokers. The object and purpose of Interest Tax Act is to levy tax on interest income earned on loans and advances. Even the Bombay High Court in the case of Durga Prasad Mandelia 1985 (9) TMI 282 - HIGH COURT OF BOMBAY has observed that in certain circumstances loan may include a deposit and a deposit may include a loan . It has also been observed that the term loan is a generic term which includes a deposit also. Further the scope of the definition u/s 2(7) is also enlarged as it includes interest not only on loans but also on advances. There is no specific provision in the Interest Tax Act which grants exemption in respect of interest on inter-corporate deposits. Thus we hold that interest tax is leviable on the interest income earned by the assessee company from inter-corporate deposits. The CIT(A) has already directed the Assessing Officer to exclude interest for the period up to 30-9-1991. Therefore on this issue the finding of the ld. CIT(A) is confirmed. In the result the assessee s appeal stands partly allowed.

Summary

Issues Involved:
1. Charging of interest tax on interest from inter-corporate deposits.
2. Applicability of the definition of 'interest' u/s 2(7) of the Interest Tax Act.
3. Distinction between 'loan' and 'deposit' for the purposes of the Interest Tax Act.

Summary:

Issue 1: Charging of Interest Tax on Interest from Inter-Corporate Deposits
The CIT(A) upheld the action of the DCIT in charging interest tax on interest of Rs. 5,96,921. However, there was a discrepancy in the quantum of interest, with the CIT(A) mentioning Rs. 4,47,343. The assessee received interest on inter-corporate deposits amounting to Rs. 14,47,290, which was included in the computation of chargeable interest by the Assessing Officer u/s 8(2) of the Interest Tax Act. The CIT(A) held that interest on inter-corporate deposits represents interest on loans and advances and is thus chargeable under section 2(7) of the Interest Tax Act, 1974. However, the CIT(A) accepted the alternative plea that interest received up to 30-9-91 should be excluded from chargeable interest and directed the Assessing Officer to verify and modify the assessment accordingly.

Issue 2: Applicability of the Definition of 'Interest' u/s 2(7) of the Interest Tax Act
The assessee argued that inter-corporate deposits are not covered in the definition of 'interest' u/s 2(7) of the Interest Tax Act, which includes interest on loans and advances but does not explicitly mention deposits. The assessee relied on several judgments to support the distinction between loans and deposits. The Revenue authorities contended that the definition of 'interest' is inclusive and clear, covering loans and advances, and thus includes inter-corporate deposits.

Issue 3: Distinction between 'Loan' and 'Deposit' for the Purposes of the Interest Tax Act
The Tribunal considered the precedents and provisions of law, noting that the Bombay High Court in Pennwalt (India) Ltd. and Durga Prasad Mandelia distinguished between loans and deposits under the Companies Act. However, the Tribunal held that the ratio of these cases cannot be applied to the Interest Tax Act. The definition of 'interest' u/s 2(7) includes interest on loans and advances, and there is no specific provision excluding interest on deposits. The Tribunal concluded that interest tax is leviable on interest income from inter-corporate deposits, confirming the CIT(A)'s direction to exclude interest received up to 30-9-91.

Conclusion:
The Tribunal confirmed the CIT(A)'s finding that interest tax is chargeable on interest from inter-corporate deposits, with the exclusion of interest received up to 30-9-91. The assessee's appeal was partly allowed.