2005 (11) TMI 199 - AT - Income Tax

Interest earned on deposits of monies - Whether, the interest earned by the assessee-corporation from investments made by way of short-term deposits with public undertakings and also in the form of securities and bonds, etc. can be covered under the definition of 'loans and advances' chargeable to tax u/s 2(7) r/w s. 5 ? - HELD THAT - Issue under reference however relates to the Act as applicable between the period 1st Oct., 1991 to 31st March, 2001. When the Act was reintroduced by Finance Act, 1991, some changes were made. The scope of the applicability of the Act was widened by extending its applicability to all other non-banking financial companies and State financial institutions besides banks and public financial institutions. It has also been contended by Revenue that in sub-s (28A) of s. 2 of IT Act, definition of 'interest' includes interest on deposits and the same analogy would apply in this Act also. Since Interest-tax Act specifically defines the expression 'interest' it would not be necessary to resort to the meaning assigned to it under a different statute. It, can conveniently be said that the omission of interest on securities in the new definition brought in statute after its amendment in 1991 was not for enlarging the scope of levy in any manner whatsoever but the scope of amendment was only to cover various entities as referred in the speech by the Hon'ble Finance Minister. From the foregoing discussion we are therefore, of the considered view that interest under the Act is confined to interest on loans and advances only and the same cannot be extended to include interest on bonds and other securities. There is however, another aspect to the issue as to whether the loans and advances shall also include deposits, so as to charge amount of interest thereon for the purpose of levying tax under this Act. Long drawn arguments were made before us on this aspect also. The dividing line between. a loan and deposit is undoubtedly very thin. It is, therefore, essential to understand the distinction between the two on the basis of judicial precedence available on record We are of the considered view that despite similarities, the two expressions 'loans' and 'deposits' are to be taken different and the distinction can be summed up by stating that in the case of loan the needy person approaches the lender for obtaining the loan therefrom. The loan is clearly lent at the terms stated by the lender. In the case of deposit, however, the depositor goes to the depositee for investing his money primarily with the intention of earning interest. In view of this legal position it has to be held that interest on deposits representing investment of surplus funds would also not fall under the definition of interest as given in s. 2(7) of the Act and as such would not be liable to interest-tax. The answer to the question under reference in our humble opinion is that-investments made by way of short-term deposits and also in the form of securities and bonds cannot be considered as loans and advances and as such interest thereon shall be outside the scope of 'interest' defined u/s 2(7) of the Act. In the result, all the three appeals of assessee stand allowed-partly for statistical purposes as announced in the open Court.

Issues Involved:
1. Taxability of interest earned on short-term deposits with public undertakings.
2. Taxability of interest earned on securities and bonds.
3. Distinction between loans and deposits for the purpose of Interest-tax Act.

Detailed Analysis:

1. Taxability of Interest Earned on Short-term Deposits with Public Undertakings:
The primary question addressed was whether the interest earned by the assessee-corporation from short-term deposits with public undertakings falls under the definition of 'loans and advances' chargeable to tax under Section 2(7) read with Section 5 of the Interest-tax Act. The assessee argued that interest-tax is payable solely on interest earned on loans and advances, not on interest from funds invested in bonds or fixed deposits. The assessee's counsel cited several judgments, including the Supreme Court's decision in Smt. Tarulata Shyam vs. CIT, emphasizing that the definition of 'interest' under Section 2(7) is exhaustive and does not allow for interpretation beyond what is explicitly stated. The Tribunal ultimately concluded that interest on deposits representing investment of surplus funds would not fall under the definition of interest as given in Section 2(7) of the Act and thus would not be liable to interest-tax.

2. Taxability of Interest Earned on Securities and Bonds:
The Tribunal considered whether interest earned on securities and bonds should be included in the chargeable interest under the Interest-tax Act. The assessee contended that interest on securities and bonds does not fall within the scope of 'loans and advances'. The Tribunal referred to the amendment in 1991, which omitted the specific exclusion of interest on securities from the definition of 'interest'. However, it was concluded that the omission was not intended to enlarge the scope of levy but to align the provisions with the IT Act. The Tribunal held that interest on securities and bonds is not exigible to tax under the Interest-tax Act.

3. Distinction Between Loans and Deposits:
A significant part of the judgment dealt with distinguishing between 'loans' and 'deposits'. The Tribunal examined various judicial precedents, including the Supreme Court's decisions in Ram Janki Devi vs. Juggilal Kamlapat and Ram Ratan Gupta vs. Director of Enforcement, which highlighted the differences between loans and deposits. The Tribunal noted that while both loans and deposits create a debtor-creditor relationship, the terms and conditions of repayment and the intent behind the transactions differ. The Tribunal concluded that despite similarities, loans and deposits are distinct, and interest on deposits should not be included in the definition of interest for the purpose of the Interest-tax Act.

Conclusion:
The Tribunal ruled that:
1. Interest earned on short-term deposits with public undertakings and from securities and bonds does not fall under the definition of 'loans and advances' and is not chargeable to tax under Section 2(7) of the Interest-tax Act.
2. The distinction between loans and deposits is significant, and interest on deposits representing investment of surplus funds is not liable to interest-tax.

The appeals were allowed partly for statistical purposes, and the matter was remanded to the assessing authority for fresh consideration in light of the Tribunal's decision.

← Previous Next →