1968 (12) TMI 11 - HC - Income Tax

Loan to government - Whether loan was a security of the State Govt. within the meaning of section 8 of the IT Act. Whether the interest on the loan is exempt from tax in the hands of the assessees under the third proviso to section 8 - Held, yes

Summary

Issues:
1. Whether a 1 1/4% loan for Rs. 4,50,00,000 is considered a security of the State Government under section 8 of the Income-tax Act?
2. Whether the interest on the 1 1/4% loan for Rs. 4 1/2 crores is exempt from tax under the third proviso to section 8?

Analysis:
The judgment addressed two questions referred by the department and the assessee regarding the nature of a 1 1/4% interest loan of O.S. Rs. 4 1/2 crores advanced by the Nizam to the Government of Hyderabad. The loan was granted at an income-tax free rate, but the Income-tax Officer rejected the claim for exemption, arguing it was not a State Government security and that the Indian Income-tax Act applied. The court noted that a previous case confirmed the loan as a State Government security but debated its tax-free status upon transfer to a trust. The Supreme Court upheld the security status but reversed the tax exemption ruling, emphasizing the loan's transfer did not affect its tax status.

The contention revolved around whether the loan was tax-free under the Indian Income-tax Act, with the assessee arguing the loan was granted with the concurrence of the Government of India and should be exempt. The court analyzed correspondences indicating the intention to keep the loan tax-free, even after the applicability of the Indian Income-tax Act. The judgment in Commissioner of Income-tax v. H.E.H. Mir Osman Ali Bahadur was cited, highlighting the loan's status as a State Government security and the exemption from income-tax. The court emphasized the contractual obligations and the importance of the tax-free condition for granting the loan.

Referring to the Supreme Court decision, the court reiterated that the loan was a State Government security and the interest was exempt from income-tax but not from super-tax. The court concluded that the department's challenge lacked merit as the loan agreement clearly stipulated tax exemption under the Indian Income-tax Act. The judgment emphasized the previous rulings and correspondence supporting the tax-free status of the loan. Ultimately, the court answered both questions in favor of the assessee, affirming the tax exemption on the loan with costs awarded to the assessee.