2016 (7) TMI 1047 - HC - Income Tax

Deposits with SAIL - whether amounted to loan and/or advance within the meaning of Section 2(7) of the Interest Act as amended with effect from 1st October, 1991? - Held that - When a definition uses an expression means and that is followed by interest on loans and advances‟ it should be considered as being exhaustive of the entire definition. However, the legislature has intended to include other two transactions under the definition. Those two transactions do not include interest on deposits. It is not therefore possible to accept the submission of Mr. Manchanda that the expression interest on loan and advances , occurring in Section 2(7) of the Act should include interest on deposits‟ as well notwithstanding that there is no reference to such interest in the definition itself. The Special Bench of the ITAT was conscious of this submission made before it and has rejected it and in view of this Court rightly. What the ITAT appears to have done in the impugned order is to re-characterise the contract entered into between HUDCO and SAIL for the purpose of the former placing deposits with the latter as a loan transaction. There was no occasion for the ITAT to do so only with a view to bringing it within the definition of Section 2(7) of the ITA, when the plain language of the statute does not contemplate interest on deposits as being included. Apart from the above, the Special Bench of the ITAT has answered the question in favour of HUDCO for the AYs 1992-93, 1993-94, 1996-97. The present appeals pertain to AYs 1994-95 and 1995-96. Therefore, applying the rule of consistency, the Court holds that there is no reason why the Revenue should not be asked to follow the judgment rendered by the Special Bench of ITAT which view has been accepted by it and has attained finality. - Decided in favour of the Assessee and against the Revenue

Summary

Issues:
Interpretation of the term 'interest' under Section 2(7) of the Interest Tax Act for deposits made by Housing and Urban Development Corporation Ltd. (HUDCO) with Steel Authority of India Limited (SAIL) for Assessment Years 1994-95 and 1995-96.

Issue 1: Interpretation of 'interest' under Section 2(7) of the Interest Tax Act
The High Court analyzed whether the interest earned by HUDCO on deposits made with SAIL could be considered as 'interest' under Section 2(7) of the Interest Tax Act. The Assessing Officer and the Commissioner of Income Tax had previously held that the interest earned fell within the definition of 'interest' as per the Act. The ITAT affirmed this decision, stating that the deposits with SAIL could be considered as loans, as they were placed under a contract and involved payment of interest by SAIL to HUDCO. However, the High Court referred to a decision of the Special Bench of the ITAT which distinguished between 'loans' and 'deposits', concluding that interest on deposits would not fall under the definition of 'interest' as given in Section 2(7) of the Act.

Issue 2: Application of the Special Bench decision
The Special Bench decision addressed the same issue for the AYs 1992-93, 1993-94, and 1996-97, ruling in favor of HUDCO. The High Court noted that the Special Bench decision had not been challenged and had attained finality. Therefore, the High Court applied the rule of consistency and held that the Revenue should follow the judgment rendered by the Special Bench of ITAT. As the present appeals pertained to AYs 1994-95 and 1995-96, the High Court ruled in favor of HUDCO based on the Special Bench decision.

Issue 3: Interpretation of the definition of 'interest' under Section 2(7) of the Interest Tax Act
The High Court examined the definition of 'interest' under Section 2(7) of the Interest Tax Act, which includes interest on loans and advances made in India. The Court emphasized that the definition should be considered exhaustive, with only two categories included under the definition apart from interest on loans and advances. The Court rejected the argument that 'interest on deposits' should be included in the definition, as the statute did not contemplate such inclusion. The High Court held that the ITAT had erred in re-characterizing the deposits as loans to bring them within the definition of 'interest' under the Act.

In conclusion, the High Court answered the question framed in both appeals in the negative, in favor of HUDCO and against the Revenue. The impugned orders of the ITAT were set aside, and both appeals were allowed with no orders as to costs.