2004 (1) TMI 311 - AT - Income Tax

Interest on various investments and deposits - chargeable to tax under the provisions of Interest-tax Act, 1974 - Whether the interest on deposits with Reserve Bank of India (RBI) and other banks is exempt from taxation under the Act - Distinction between 'loans' and 'deposits' for tax purposes - HELD THAT - We are of the considered view that although the terms 'loans' and 'deposits' are not mutually exclusive yet, they are not the same thing. The most distinguishing feature which is relevant for resolving the controversy before us is that in case of loan, the needy person approaches the lender for seeking loan at the terms of the lender while in the case of deposit, it is the depositor, who goes to the depositee for investing his money primarily with the intention to earn interest. That is why the Hon'ble Supreme Court held in the case of Ram Ratan Gupta 1965 (8) TMI 54 - SUPREME COURT that deposit even in current account with the bank did not amount to loan. In view of such distinction, we are of the view that the interest on deposits would not fall within the ambit of the expression 'chargeable interest' appearing in section 5 of the Act. Thus, it is held that interest on special deposits with Reserve Bank of India (RBI) is not taxable under the Act. RBI is the principal bank ofIndiaand, therefore, the question of lending any money to such bank simply does not arise. It is only the RBI which lend money to banks and other institutions to meet their requirements and not the vice versa. Such deposit was made under a special scheme approved under the provisions of section 27B of Insurance Act. Hence, such interest would be excluded from the chargeable interest. Similarly, it is further held that interest on fixed deposits, certificate deposits as well as interest on deposits with IDBI are not chargeable to tax under the Act since such deposits cannot be considered as loans inasmuch as the money is given at the instance of the assessee for the purpose of investing the same with the banks in consonance with the provisions of section 27B of the Insurance Act. The deposit with IDBI was made at the instance of assessee to meet the requirement of section 32AB. Consequently, such interest shall also be excluded from the chargeable interest. As far as interest on loan given to DDA and UTI is concerned, it is held that the same has been rightly included by the lower authorities in the chargeable interest. As far as other items are concerned, we set aside the orders of first appellate authority and restore the matter to the file of Assessing Officer, who shall first determine the nature of the transactions and then decide whether such interest would be taxable or not. In the result, appeals of the assessee are partly allowed.

Summary

Issues Involved:
1. Taxability of interest on various investments and deposits under the Interest-tax Act, 1974.
2. Distinction between 'loans' and 'deposits' for tax purposes.
3. Specific taxability of interest on special deposits with RBI, fixed deposits, certificate deposits, deposits with IDBI, loans to DDA and UTI, and other items.

Summary:

1. Taxability of Interest on Various Investments and Deposits:
The primary issue in these appeals is whether the interest received by the assessee on various investments and deposits is chargeable to tax u/s 5 read with sections 2(5) and 2(7) of the Interest-tax Act, 1974. The assessee, engaged in the business of general insurance, did not declare interest received on certain investments and deposits, arguing that such interest did not fall within the ambit of 'loans' and 'advances'. The Assessing Officer included this interest in the taxable amount, which was upheld by the first appellate authority.

2. Distinction Between 'Loans' and 'Deposits':
The Tribunal examined the definitions and distinctions between 'loans' and 'deposits'. It was noted that while both involve a debtor-creditor relationship and are repayable, a loan is given at the instance of the borrower, whereas a deposit is made at the instance of the depositor. The Tribunal referred to various case laws and legislative provisions to highlight that loans and deposits are not mutually exclusive but have distinct characteristics. For instance, the Limitation Act and the Income-tax Act, 1961, prescribe different treatments for loans and deposits.

3. Specific Taxability of Interest:
- Interest on Debentures, Bonds, and Securities: The Tribunal held that interest on debentures, bonds, and securities is not chargeable to tax under the Act, following the decision in Punjab National Bank v. Dy. CIT and CIT v. Sahara India Savings & Investments Corpn.
- Interest on Special Deposits with RBI: It was held that interest on special deposits with RBI is not taxable under the Act, as RBI is the principal bank of India, and the deposit was made under a special scheme approved u/s 27B of the Insurance Act.
- Interest on Fixed Deposits, Certificate Deposits, and Deposits with IDBI: The Tribunal held that such interest is not chargeable to tax since these deposits cannot be considered loans. The deposits were made at the instance of the assessee for investment purposes in line with section 27B of the Insurance Act and section 32AB.
- Interest on Loans to DDA and UTI: The Tribunal upheld the inclusion of interest on loans to DDA and UTI in the chargeable interest.
- Other Items: The Tribunal set aside the orders of the first appellate authority and remanded the matter to the Assessing Officer to determine the nature of the transactions and decide on their taxability.

Conclusion:
The appeals of the assessee are partly allowed, with specific directions on the taxability of different types of interest.