2016 (8) TMI 113 - HC - Income Tax

Interest on inter corporate deposit - whether was not chargeable to tax under the Interest Tax Act? - whether inter corporate deposit can neither be treated as loan nor an advance? - Held that - Questions raised in these appeals are already settled by a judgment of the Delhi High Court rendered in the case of Commissioner of Income-tax v. Visisth Chay Vyapar Ltd., 2011 (Delhi) (2011 (8) TMI 783 - Delhi High Court wherein, it has been held that the expression advance occurring in section 2(7) along with the expression loan should take its colour from loan and cannot be given wider interpretation to include deposit as well, otherwise, money deposits given for investments, etc., would also qualify as advances and interest thereon would become exigible to the Interesttax Act. Such a situation was never contemplated by the legislature. Hence, inter-corporate deposit is not in the nature of loan or advance within the meaning of section 2(7) and therefore, not chargeable to the interest-tax under section 5 - Decided in favour of the assessee

Summary

Issues involved:
1. Interpretation of the Income Tax Act regarding the taxability of income from interest on inter-corporate deposit.
2. Determination of whether inter-corporate deposit can be considered as a loan or an advance for tax assessment purposes.
3. Assessment of the penalty levied under section 13 of the Interest Tax Act.

Comprehensive Analysis:
Issue 1: The primary issue in this case revolves around the taxability of income from interest on inter-corporate deposit under the Income Tax Act. The Tribunal had to determine whether the income from interest on inter-corporate deposit was chargeable to tax under the Interest Tax Act. The Appellate Tribunal held that the income from interest on inter-corporate deposit was not chargeable to tax under the Interest Tax Act.

Issue 2: Another crucial aspect of this case was to ascertain whether an inter-corporate deposit could be categorized as a loan or an advance for tax assessment purposes. The Tribunal had to decide whether an inter-corporate deposit could be treated as a loan or an advance and whether the interest on such deposit should be excluded from the assessment of the assessee. The Appellate Tribunal concluded that an inter-corporate deposit cannot be considered as a loan or an advance, directing the Assessing Officer to exclude the interest on inter-corporate deposit from the assessment of the assessee.

Issue 3: The final issue pertained to the cancellation of the penalty levied under section 13 of the Interest Tax Act. The Tribunal had to determine whether the penalty levied under section 13 of the Interest Tax Act should be upheld or canceled. The Appellate Tribunal decided to cancel the penalty levied under section 13 of the Interest Tax Act.

In a related judgment by the Delhi High Court, it was established that the expression "advance" in the context of the Income Tax Act should be construed in conjunction with the term "loan" and not given a broader interpretation to include deposits. The court ruled that inter-corporate deposits do not fall under the definition of loan or advance as per section 2(7) of the Act, and therefore, are not chargeable to interest tax under section 5.

Ultimately, the High Court concurred with the Delhi High Court's decision and ruled in favor of the assessee on all three issues. Consequently, the appeals were dismissed, and no costs were awarded. The judgment in Tax Appeal No.1214/2007 & allied matters dated 27.06.2016 governed the issues raised in this Tax Appeal, leading to its disposal in line with the previous judgment.