2005 (10) TMI 51 - HC - Income Tax

Interest-tax Act - Whether, Tribunal was right in holding that interest on Government securities, interest on tax free investment, interest on bonds, interest on treasury bills and interest received on investment deposit scheme-IDBI would not be subject to tax under the Interest-tax Act? - we hold that the Tribunal was right in holding that interest on Government securities, interest on tax free investment, interest on bonds, interest on treasury bills and interest received on investment deposit scheme-IDBI would not be subject to tax under the Interest-tax Act.

Summary

Issues:
Interpretation of the Interest-tax Act regarding the taxation of interest on various securities.

Analysis:
The High Court of Madras heard an appeal against the order of the Income-tax Appellate Tribunal concerning the taxation of interest on different securities by a scheduled bank for the assessment year 1995-96. The appellant, the Revenue, contended that the interest received from Government securities, tax-free investments, bonds, treasury bills, and an investment deposit scheme should be subjected to interest-tax. However, the Commissioner of Income-tax (Appeals) directed the exclusion of interest received from these securities from the chargeable interest computation, a decision upheld by the Appellate Tribunal.

The Revenue raised a substantial question of law challenging the Tribunal's decision on the taxation of the mentioned interests under the Interest-tax Act. The Court noted that the issue was previously addressed by the Bombay High Court in Discount and Finance House of India Ltd. v. S.K. Bhardwaj, CIT [2003] 259 ITR 295. The Bombay High Court's decision emphasized that interest on dated Government securities did not fall within the definition of 'interest on loans and advances' under the Act. The Court highlighted the distinction between lending and investment, stating that interest received from the Reserve Bank of India on dated Government securities would not be taxable under the Act.

The Court further clarified that the issue of levying interest-tax on such securities falls under the revisional jurisdiction of the Commissioner of Income-tax. It was also emphasized that taxing the interest received from the RBI on dated Government securities indirectly taxed the RBI itself, which was impermissible under the Act. Based on these principles, the Court upheld the Tribunal's decision, ruling that interest on Government securities, tax-free investments, bonds, treasury bills, and an investment deposit scheme would not be subject to tax under the Interest-tax Act. Consequently, the appeal by the Revenue was dismissed, with costs not awarded.