2015 (7) TMI 53 - HC - Income Tax

Interest tax on interest on bonds and debentures - Whether Tribunal was right in holding that interest tax is not leviable on interest on bonds and debentures? - Held that - Investment made by an assessee either in bonds or in debentures was not contemplated. What has been contemplated is loans and advances. The investment made in bonds and debentures can by no stretch of imagination be considered to be either a loan or an advance. In pith and substance, it may have some affinity with the concept of loan and advance, but it is not possible to presume that the legislature was unaware of the distinction between an investment in bonds and debentures and loans and advances. The legislature has not provided for inclusion of interest earned from bonds and debentures within the purview of the Interest Tax Act. If we look at the object sought to be achieved by the Act as discussed by the Bombay High Court in the case of Discount and Finance House of India Ltd.(2002 (12) TMI 72 - BOMBAY High Court ), the object cannot be achieved by roping in interest earned from debentures and bonds. The view taken by the learned Tribunal is a perfectly justified view and no interference is called for. The question no.1 is answered in the affirmative.

Summary

Issues:
1. Whether interest earned from debentures and bonds is exigible to interest tax under the Interest Tax Act?

Analysis:
The primary issue in this case is whether interest earned from debentures and bonds is subject to interest tax under the Interest Tax Act. The revenue challenged a judgment by the Tribunal that held interest from debentures and bonds not liable to interest tax. The revenue raised two questions, but the Court noted that there was only one core issue. The revenue argued that interest on bonds and debentures should be taxable under the Interest Tax Act based on a judgment of the Bombay High Court. However, the Tribunal emphasized that interest tax serves specific purposes, including as an anti-inflationary measure and revenue augmentation. It reasoned that taxing interest on securities would not achieve the desired monetary impact and could have adverse fiscal implications.

Regarding the interpretation of the Interest Tax Act, the Court examined the definition of "interest" under the Act, which includes interest on loans and advances but does not explicitly mention interest from bonds or debentures. The Court highlighted that the legislature did not include interest earned from bonds and debentures in the Act's purview. The Court also considered a departmental instruction from 1995, which stated that interest on debentures, bonds, and securities is subject to interest tax. However, the Court deemed this instruction irrelevant for resolving the issue at hand.

Ultimately, the Court upheld the Tribunal's decision, stating that the view taken was justified. It concluded that interest earned from debentures and bonds should not be subject to interest tax under the Interest Tax Act. The Court answered the first question in the affirmative and deemed the second question unnecessary to address. Consequently, the appeal was disposed of in favor of the assessee, affirming that interest from debentures and bonds is not exigible to interest tax under the Act.