Income Tax Appellate Tribunal - Delhi
A.N.Z. Grindlays Bank vs Deputy Commissioner Of Income Tax on 21 August, 2001
Equivalent citations: (2003)79TTJ(DELHI)475
ORDER
Sikander Khan, A.M.
1.This is an appeal by the assessee which is a foreign bank. In all eleven grounds have been raised in this appeal. They, however, relate to one issue of taxability , of interest on securities, bonds and debentures amounting to Rs. 71,43,62,246 under the Interest-tax Act.
2. The assessee claimed interest on securities, bonds/and debentures exempt . under the Interest-tax Act on the ground that under Section 2(7) of the Act, the interest on loans and advances was taxable and as interest on securities, bonds and debentures was not interest on loans and advances the same was not liable to taxation under the Interest-tax Act.
3. The AO was not convinced with the assessee's contention. He was of the view that loans and advances included securities, bonds and debentures and, therefore, interest on securities, bonds and debentures was also liable to taxation under Section 2(7) of the Interest-tax Act. He observed that in the earlier version of the Interest-tax Act, interest on securities, bonds and debentures was specifically exempt and excluded but in the revised version of the Act effective from 1st Oct., 1991, similar exemption was not made in the Act. From this he concluded that interest on securities, bonds and debentures was also liable to taxation along with the interest on loans and advances. In view of these the AO added interest on securities, bonds, and debentures amounting to Rs. 78,98,98,235.
4. Aggrieved, the assessee preferred first appeal before the learned CIT(A) who upheld the AO's order. He observed that the AO's finding was correct. The AO also relied on CBDT Instruction No. 1923 issued to the Departmental officers on the subject whether interest on debentures, bonds and securities, etc., were taxable under the Interest-tax Act. In this instruction, the CBDT instructed that interest on securities, bonds and debentures was exigible to interest-tax.
5. Aggrieved, further the assessee has come up in second appeal before this Tribunal. Mrs. Shashi Kapila, advocate appearing for the assessee, submitted that the AO and the learned CIT(A) were not justified in charging interest-tax on the' interest earned on securities, bonds and debentures. She referred to Section 2(7) of the Interest-tax Act and contended that interest for the purpose of Interest-tax Act did not include within its meaning and scope the interest on securities, bonds and debentures. As per this section, interest on loans and advances made in India was chargeable to interest-tax and as interest on securities, bonds and debentures was different from interest on loans and advances and was not included within the meaning and scope of loans and advances, the interest on securities, bonds and debentures could not be legally brought to tax under the Interest-tax Act. She added that meaning of interest on loans and advances as given in Section 2(7) was exhaustive considering the words 'means' 'includes' and 'does not include' used in Section 2(7) which made the meaning of interest given in Section 2(7) as exhaustive. She contended that in view of the exhaustive nature of the definition there was no scope for any further addition to or extraction from the same. She relied on the Supreme Court decisions reported in AIR 1989 SC 335 and AIR 1995 SC 1395. She added that the investments made by a banking company in securities, bonds, debentures could not be held to be loans and advances. She also referred to the provisions of Section 2(28A) and Section 2(28B) of the IT Act, wherein the interest simplicitor and interest on securities, bonds and debentures are defined separately. Hence, the interest on loans and advances and interest on securities could not be treated similarly.
6. She further submitted that merely becausa in the earlier version of the Interest-tax Act there was specific exemption and exclusion of interest on securities and as in the revised version of the Act there was no similar specific provision for such exemption, it could not be concluded that interest on securities was liable to interest-tax. She added that if the legislature had intended to bring interest on securities, etc., within the ambit of chargeable interest it would have specifically enacted so. However, as was evident from the meaning given to interest under Section 2(7) of the Interest-tax Act only, interest on loans and advances made in India had been made chargeable to Interest-tax Act. She contended that the scope and ambit of the Act could not be enlarged merely by implication without there being specific provision. No tax could be imposed on the subject without the words in the Act clearly showing an intention to lay the burden upon him. The subject could not be taxed unless he came under the provisions of law. There was no room for taxing the subject on presumption or intendment.
7. The learned counsel further submitted that the provisions of Section 26C of the Act provided for passing on the incidence of the tax to the borrower and accordingly it made it lawful to increase the rate of interest to the extent the credit institution was liable to pay interest-tax on interest on loans taken prior to 1st Oct., 1992. She stated that in case of securities, bonds, debentures such passing on of the incidence of interest-tax was not possible and on this ground also interest on securities, bonds and debentures had to be treated daily (sic) but from interest on loans and advances for the purpose of Interest-tax Act. In this connection, she referred to the Finance Minister's speech while introducing the revised Interest-tax Act. She also referred to RBI Circular. Ref. DBOD No. BPBC 20/C. 469(1)-91, dt. 2nd Sept., 1991.
8. The learned counsel further submitted that the learned CIT{A) was not justified in upholding the AO's order in view of the CBDT Instruction No. 1923. She added that the learned CIT(A) should have decided the issue on the basis of legal provision and not on the basis of the CBDT instruction. She contended that CBDT could not prempt judicial interpretation of the scope and ambit the correct provision of the Act by issuing internal departmental instruction on the subject. She also relied on the Supreme Court decision in the case J.K, Synthetics Ltd. and Ors. v. CBDT and Ors. (1972) 83 ITR 335 (SC).
9. The learned counsel further submitted that the ITAT Bangalore Bench in the case of Karnataka Bank Ltd. v. Dy. CIT (1998) 60 TTJ (Bang) 103 examined in detail the nature of interest on securities, bonds and debentures, in the light of the accountancy practice, the provisions of Section 2(7} of the Interest-tax Act and held that securities, bonds and debentures did not constitute loans and advances which were chargeable to interest-tax. They had relied upon the judgment of the Madras High Court in the case CIT v. Lakshmi Vilas Bank Ltd., where the Court held that interest on debentures did not fall within the ambit of Section 2(7) of the Interest-tax Act. She also referred to the ITAT Mumbai Bench 'A' order dt. 20th March, 2001, in the case of LIC of India v. Jt. Commi. of Interest-tax (vide Interest-tax Appeal 9/Bom/96, 53/Bom/98, 39/Bom/97, 46/Bom/98 and 2/Bom/2000) for the asst. yrs. 1992-93, 1993-94, 1994-95, 1995-96 and 1996-97 [reported at (2002) 74 TTJ (Mum) 624--Ed]. She urged that the decision of the ITAT Hyderabad Bench in the case of State Bank of Hyderabad v. Dy. CIT (1998) 61 TTJ (Hyd) 678 which is in favour of the Revenue should not be followed in view of several decisions on the issue in favour of the assessee and in view of the Supreme Court decision in the case of J.K. Synthetics Ltd. (supra) to the effect that if there are two views on the same issue, the view in favour of the assessee should be adopted.
10. The learned Departmental Representative, on the other hand, supported the orders of the learned CIT(A) and the AO and reiterated the reasons given by them in support of the view that interest on securities, bonds and debentures was also liable to Interest-tax. He relied on ITAT Hyderabad Bench decision in the case of State Bank of Hyderabad (supra), Bombay High Court decision in the case of Unit Trust of India and Anr. v. P.K. Unny, ITO and Ors. (2001) 249 ITR 612 (Bom), Delhi High Court decision in Hidrive Finance Ltd. v. Appropriate Authority and Ors. (2001) 249 ITR 34 (Del), Calcutta High Court decision in CIT v. Sijua (Jharriah) Electric Supply Co. Ltd. (1984) 145 ITR 740 (Cal), Madras High Court decision in CIT v. Madurai District Central Co-operative Bank Ltd. (1984) 148 ITR 196 (Mad) and 1 article in 250 ITR 1 Journal portion. He also submitted that the decision in (1972) 83 ITR 335 (SC) (supra) relied upon by the assessee was not relevant in the case.
11. In reply the learned counsel for the assessee submitted that the dispute in the UTI's case (supra) was different from the dispute in the present case but certain observations of the Bombay High Court regarding passing of the burden of the interest-tax to the borrower was supportive of the assessee's stand in the present case.
12. We have considered the rival submissions and the materials on the file. We are of the view that interest on securities, bonds and debentures was not covered under Section 2(7) of the Interest-tax Act. Section 2(7) of the Act reads as under :
"'Interest' means interest on loans and advances made in India and includes :
(a) commitment charges on unutilised portion of any credit sanctioned for being availed of in India; and
(b) discount on promissory notes and bills of exchange drawn or made in India; but does not include
(i) interest referred to in Sub-section (1B) of Section 42 of the Reserve Bank of India Act, 1934 (2 of 1934)
(ii) discount on treasury bills."
In terms of the above definition it is only the interest on loans and advances made in India which could be charged to interest-tax. Interest on securities, bonds and debentures could not be classified as 'interest on loans and advances'. Investments in securities, bonds and debentures are different from loans and advances. The distinction between the two have been elaborately and appropriately discussed by the ITAT Bombay Bench, Bombay, in its order dt. 20th March, 2001, in the case of LIC of India, Bombay, vide Interest-tax, Appeal No. 9/Bom/96, etc. Although, admittedly securities, bonds and debentures are form of raising loans for the borrower but for the credit institution or interest for that matter any other subscriber/purchaser, they are investments. These investments are different and separate from giving loans and advances. Further, the learned counsel rightly pointed out that the words 'means', 'includes' and lastly 'but does not include' used in Section 2(7) of the Act in giving the meaning of the word interest clearly show that the meaning of the word interest given in Section 2(7) is exhaustive and, therefore, there is no scope for giving any imputation, implication, presumption or addition or substraction to what has been clearly and exhaustively mentioned in Section 2(7) of the Act. Hence, it will not be legally possible and acceptable to say that the definition of interest given in Section 2(7) of the Act will include interest on securities, bonds and debentures. In this view of the matter the view taken by the AO and the learned CIT(A) that because interest on securities, bonds and debentures has not been specifically exempted and excluded such interest is liable to interest-tax appears to be presurnptious and fallacious as without the support of the provisions of the Act. The fact that interest on loans and advances and interest on securities, bonds, debentures are separate and different can also be gauged and understood by making reference to the provisions of the IT Act. Section 2(10) of the Interest-tax Act provides that all other words or expression used in the Interest-tax Act but defined in the IT Act shall have the meaning respectively assigned to them in the IT Act. Sub-section (28A) of Section 2 of the IT Act defines interest as 'interest' means :
"Interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and include any services fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised."
13. Sub-section (28B) of Section 2 of the IT Act defines interest on securities as under :
'"Interest on securities' means :
(i) interest on any security of the Central Government or a State Government.
{ii} interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provinicial Act."
From the above it is clear that interest on debentures is nothing but interest on securities under the IT Act and hence the same is different from interest on loans and advances. Accordingly, interest on securities, bonds and debentures cannot be treated as part of interest on loans and advances.
14. The learned counsel for the assessee again rightly pointed out that from the provision of the Act, Finance Minister's speech and the RBI circular to the scheduled bank for passing on the incidence of the interest-tax pro rata to the borrower, it was clear that the incidence of the interest-tax was not to be borne by the bank. As in the case of securities, bonds and debentures there is no scope for passing on the incidence of the Interest-tax to the borrower, the burden of the interest-tax on interest from securities, bonds and debentures, if imposed, would fall on the bank. The rates of interest on security bonds, debentures cannot be modified to cover the incidence of Interest-tax. Thus, the.. provisions of the Act, the Finance Minister's speech and the RBI's circular would stand circumvented and violated and there would be discrimination effect if interest-tax were imposed on interest on securities, bonds and debentures. No materials were brought on record to show that assessee had passed on incidence of Interest-tax where investments were made in securities, bonds and debentures, etc., on their private placements by borrowers or otherwise.
15. The learned counsel for the assessee again rightly contended that the CBDT instruction might be binding on the AO but the same was not binding on the learned CIT(A) and in any case it was not at all binding on the ITAT which are required to decide the issue according to provisions of law and decided case law. We are of the view that the CBDT instruction referred to above is not consistent with the provisions of law and the decided case law as referred to above. The correct position of law in this regard is that interest on security, bonds and debentures is not part of the interest on loans and advances and. as such it was not liable to Interest-tax. We are in agreement with the view of the Bombay Bench expressed in the case of L/C of India, Bombay, (supra) and ITAT Bangalore Bench in the case of Karnataka Bank Ltd. (supra). The Madras High Court decision in the case of CIT v. Laxmi Vilas Bank Ltd. (supra) is also supportive of this view. We respectfully disagree with the Hyderabad Bench in the aforesaid view taken in the case of State Bank of Hyderabad (supra). While taking view favourable to the assessee we also keep in mind the Supreme Court decisions in the cases of CIT v. Shaan Finance (P) Ltd., and Mysore Minerals Ltd. v. CIT.
16. In the result, the appeal filed by the assessee is allowed.