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Issues Involved:
Taxability of interest on securities, bonds, and debentures under the Interest-tax Act. Detailed Analysis: 1. Assessee's Claim: The assessee, a foreign bank, claimed that interest on securities, bonds, and debentures should be exempt under the Interest-tax Act. They argued that under section 2(7) of the Act, only interest on loans and advances was taxable, and since interest on securities, bonds, and debentures did not fall under this category, it should not be subject to tax. 2. Assessing Officer's (AO) View: The AO disagreed with the assessee's contention, asserting that loans and advances included securities, bonds, and debentures. Consequently, interest on these instruments was also liable to taxation under section 2(7) of the Interest-tax Act. The AO noted that the earlier version of the Act specifically exempted interest on these instruments, but the revised version effective from 1st October 1991 did not, leading to the conclusion that such interest was now taxable. 3. First Appeal to CIT(A): The assessee's first appeal to the Commissioner of Income Tax (Appeals) [CIT(A)] was unsuccessful. The CIT(A) upheld the AO's order, relying on CBDT Instruction No. 1923, which directed that interest on securities, bonds, and debentures was taxable under the Interest-tax Act. 4. Second Appeal to ITAT: In the second appeal before the ITAT, the assessee's counsel argued that the AO and CIT(A) were incorrect in their interpretation. The counsel emphasized that section 2(7) of the Interest-tax Act did not include interest on securities, bonds, and debentures within its scope. The definition of interest in section 2(7) was exhaustive, as indicated by the terms "means," "includes," and "does not include." The counsel cited Supreme Court decisions to support the argument that investments in securities, bonds, and debentures could not be equated with loans and advances. 5. Legislative Intent and Interpretation: The counsel further argued that the absence of a specific exemption for interest on securities in the revised Act did not imply taxability. If the legislature intended to tax such interest, it would have explicitly stated so. The scope of the Act could not be expanded by implication. Additionally, section 26C of the Act allowed passing on the tax incidence to borrowers, which was not feasible for securities, bonds, and debentures. 6. CBDT Instruction and Judicial Interpretation: The counsel contended that the CIT(A) should not have relied on the CBDT instruction but should have based the decision on legal provisions. The CBDT could not preempt judicial interpretation through internal instructions. The counsel referenced several judicial decisions, including ITAT Bangalore Bench in Karnataka Bank Ltd. and Madras High Court in CIT vs. Lakshmi Vilas Bank Ltd., which supported the assessee's view that interest on securities, bonds, and debentures was not taxable under section 2(7). 7. Departmental Representative's Argument: The Departmental Representative supported the orders of the CIT(A) and AO, citing various judicial decisions that upheld the taxability of interest on securities, bonds, and debentures under the Interest-tax Act. 8. Tribunal's Decision: The ITAT concluded that interest on securities, bonds, and debentures was not covered under section 2(7) of the Interest-tax Act. The definition of interest in section 2(7) was exhaustive and did not include interest on these instruments. Investments in securities, bonds, and debentures were distinct from loans and advances. The Tribunal noted that the CBDT instruction was not binding on the CIT(A) or the ITAT. The Tribunal agreed with the views expressed by the ITAT Bombay Bench in LIC of India and ITAT Bangalore Bench in Karnataka Bank Ltd., and disagreed with the Hyderabad Bench in State Bank of Hyderabad. The appeal filed by the assessee was allowed. Conclusion: The ITAT ruled that interest on securities, bonds, and debentures was not taxable under section 2(7) of the Interest-tax Act, allowing the appeal filed by the assessee.
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