Karnataka High Court
Commissioner Of Income Tax vs Vijaya Bank [Alongwith It Ref. Case Nos. ... on 23 September, 2005
Equivalent citations: (2005)199CTR(KAR)329, [2006]285ITR97(KAR), [2006]285ITR97(KARN)
Bench: R. Gururajan, H.N. Nagamohan Das
ORDER
1. These references are at the instance of the Revenue. Since the facts and the law involved in all the cases are same or similar, all references are disposed of by this common order.
2. Facts as narrated by the Tribunal are as under :
Assessee-banks filed interest-tax returns for the asst. yrs. 1992-93, 1993-94, 1994-95 and 1995-96 and they were accepted. Subsequently, those assessments were reopened under Section 10 of the Interest-tax Act on the ground that the assessees had failed to declare the entire interest earned on securities. A notice was issued. Assessees again filed returns of interest showing the same figure as was shown in the original returns. Assessees objected to the addition of interest on securities to chargeable interest on the ground that the interest chargeable under Interest-tax Act was only interest on loans and advances and securities do not fall within the purview of definition of 'interest' under the Interest-tax Act.
Banks' contention was rejected. The entire interest on securities were brought to tax. Appeals were preferred before the CIT(A). Appeals stood dismissed. Thereafter, banks preferred appeals before the Tribunal. The Tribunal in the leading judgment Canara Bank v. Dy. CIT ruled that interest on securities cannot be brought to tax but only the interest on loans and advances is chargeable to tax. The Tribunal ruled that in its considered view provisions of Section 10A of the Interest-tax Act have no application. It has also ruled in the order that the interest on securities cannot be brought to tax but only the interest on loans and advances are chargeable to tax as amended by the Finance Act. The Tribunal ruled that the authorities are not justified in bringing to tax interest on securities for all the four years under appeal.
3. Revenue sought for a reference by way of application under Section 256(1)" of the IT Act.
4. The Tribunal after hearing has chosen to refer the following two questions for our opinion :
(a) Whether, on facts and in the circumstances of the case, Tribunal is right in holding that the reopening of assessment under Section 10 of the Interest-tax Act is bad in law ?
(b) Whether, on the facts and in the circumstances of the case, Tribunal is right in law in holding that interest on securities does not form part of chargeable interest for the purpose of interest-tax ?
5. Heard Sri Seshachala, learned standing counsel for the Revenue, and Sri Sarangan and Sri Kumar, learned senior counsel for the banks.
6. Sri Seshachala, learned counsel for the Revenue, would argue that the material on record would require this Court to answer the question of law referred to this Court in the affirmative. He would take us through the material on record to say that the' Tribunal is wrong in its interference and its interpretation with regard to liability of tax in terms of the interest-tax. Learned counsel would argue that Section 10 is squarely applicable to the facts of this case. A notification issued under Section 28 would be an information. He, therefore, says that reopening is in accordance with law.
7. Insofar as the merits of the matter is concerned, he would invite our attention to the various provisions of the Interest-tax Act, IT Act and Public Debt Act to convince us with regard to the second question of law referred to us. He would refer to the objects of Interest-tax Act and in particular he invites our attention to the Indian Securities Act, 1920, Public Debt Act, 1944, the Security (Contract Regulation) Act, 1956 and the dictionary meaning of 'loan' in support of his submission. He would argue that Section 2(7) earlier specifically provided for exclusion with regard to interest on securities. Later on, the exclusion is included. Therefore, according to him, in the light of inclusion of exclusion it has to be an inclusion for the purpose of Interest-tax Act. He would rely on Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT and CWT v. Smt. Janki Kishoti Devi in the matter.
8. While countering the arguments of the learned counsel for the petitioners, Sri Sarangan, learned senior counsel would invite our attention to the order of the Tribunal, to say that the order of the Tribunal is proper and legal. The Tribunal after analysing the various relevant factors has come to a right conclusion in answering this issue in favour of the assessee. Insofar as reopening is concerned, he would say that reopening is bad in law in terms of the reasons for reopening as contained in the file of the Department. He would further invite our attention to the Interest-tax Act, in particular to Section 2(7) and Section 28 to say that no tax could be levied on the interest received towards security for the purpose of loan at the hands of the Government. He says that the legislature in its wisdom has chosen to exclude the inclusion. The intention is not to include and any inclusion in terms of the argument of the Revenue would be an act of legislation by this Court and that legislation is impermissible in terms of the well-settled legal principles.
9. Learned counsel also invites our attention to various other provisions of relevant statute to say that 'interest on securities' is entirely different from 'loans and advances'. In case of 'loans and advances' interest is paid and in the case of 'securities' interest is received. Therefore, he says that the Tribunal is justified in answering the said issue in favour of the assessees. He would rely on various judgments in support of his submission.
10. After hearing, we have carefully perused the material on record. Re : Question No. 1
11. The first question referred to this Court in the case on hand is with regard to reopening of assessment under Section 10 of the Interest-tax Act. In this connection we have to refer to Section 10 itself to understand the scope of reopening of escaped assessment in terms of the provisions. The said section reads as under :
"10. If-
(a) the AO has reason to believe that by reason of the omission or failure on the part of the assessee to make a return under Section 7 or for any assessment year or to disclose fully and truly all material facts necessary for his assessment for any assessment year, chargeable interest for that year has escaped assessment or has been underassessed or has been made the subject of excessive relief under this Act, or
(b) notwithstanding that there has been no omission or fairly as mentioned in cl. (a) on the part of the assessee, the AO has, in consequence of information in his possession, reason to believe that chargeable interest assessable for any assessment year has escaped assessment or has been underassessed or has been the subject of excessive relief under this Act, he may, in cases falling under cl. (a) at any time, and in cases falling under cl. (b), at any time within four years of the end of that assessment year, serve on the assessee a notice containing all or any of the requirements which may be included in a notice under Section 7, and may proceed to assess or reassess, the amount chargeable to interest-tax, and the provisions of this Act shall, so far as may be, apply, as if the notice were a notice issued under that section."
12. According to petitioners s." 10(b) is applicable to the facts of this case. The said provision provides for reopening of the assessment in consequence of information in the. possession of an AO in terms of Section 10(b) of the Act. In the course of arguments, it is brought to our attention by the learned counsel for the Department that in the light of the notification dt. 11th Sept., 1995 the Department has reopened the assessment since that notification would be 'information' for the purpose of the Act. He would rely on a judgment of the Supreme Court in Mahamj Kumar Kamal Singh v. CIT wherein the Supreme Court has considered that the word 'information' in Section 34(l)(b) included information as to the true and correct status of law and so would cover information as to relevant judicial decisions. He would say that in the light of the notification, the Department is justified in reopening the assessment under Section 10(b) of the Act. Sri Sarangan, learned senior counsel, on the other hand, would rely on Indian & Eastern Newspaper Society v. CIT to say that the opinion of an internal audit party of the IT Department on a point of law cannot be regarded as 'information' within the meaning of Section 147(b) of the IT Act. In the light of these judgments, we factually wanted to know what was the 'information' that was available to the AO in terms of the material available on record.
We see from the order of the Tribunal that the AO has given reasons for reopening and the same is culled out as under :
"It is seen from the original return of chargeable interest filed by the assessee that the assessee has not made full disclosure of the chargeable interest. As per the definition in the Interest-tax Act, chargeable interest includes interest received from loans and advances. The assessee-bank holds number of securities and debentures issued by various Governments, statutory authorities and corporate bodies. This is evident from the details filed along with return of income. The interest received on such accounts is also in the nature of interest on loans and advances. The assessee has not given any reason as to why this is not includible in the chargeable interest. In fact,' for the assessment years earlier to 1985-86, the Interest-tax Act specifically excluded interest on securities from the purview of chargeable interest. For the asst. yr. 1992-93, there is no such exclusion (in the definition of chargeable interest) which means that interest on securities/debentures is part of the chargeable interest. On account of omission on the part of the assessee to include this, chargeable interest has escaped assessment within the meaning of Section 10 of the Interest-tax Act.
Issue notice under Section 10."
The reason for reopening the assessments is as follows :
"The Finance (No. 2) Act, 1991 w.e.f. 1st Oct., 1991, had revived the levy of interest-tax. Before this amendment, interest on securities was specifically excluded from the purview of interest-tax in the Interest-tax Act. The amendment has brought the interest on securities into the ambit of interest-tax in the Interest-tax Act by deleting the cl. (b)(I) in the newly substituted definition of Section 2(7). Thus, it is very clear that interest on securities is subject to interest-tax."
13. In the light of these reasons what is clear to us is that there is no reference to the notification as sought to be argued before us for the purpose of reopening of the assessment in terms of Section 10 of the Act. At this stage, we must notice a binding judgment of the Supreme Court in Andhra Bank Ltd. v. CIT and the Supreme Court has ruled that reopening of the assessment is not possible unless any information came from extraneous source. The Supreme Court also ruled that there was no information available with the ITO on the basis of which he could reopen the assessments. This was a case of mere change in opinion and, therefore, the assessments had not been validly reopened under Section 147(b) of the IT Act. The said judgment is applicable to the facts of this case. Material facts would show that there is only change of opinion and that there is no information as such, as required in terms of Section 10 of the Act. In the light of this clear factual position available on record we are of the view that the Department could not have reopened the assessment in the absence of acceptable information available in terms of Section 10(b) of the Interest-tax Act. In the light of this clear factual possession (sic-position) available on record and also the judgment of the Supreme Court, the argument of the assessee has to be accepted. In the given circumstances, we do not think that it is necessary to refer to all the other judgments for the purpose of deciding the issue in question.
14. In these circumstances, we answer this question in favour of the assessees. Re. Question No. 2
15. The second question that is referred to us is whether Tribunal is right in holding that the reopening of assessment under Section 10 of the Interest-tax Act is bad in law [sic-this is the first question, wrongly said as second question-Ed.]. This issue would cover the merits of the matter.
16. In terms of the proceedings of the ITO the concluded proceedings were reopened. AO ruled that the interest received on securities is taxable, since according to him, it is nothing but a loan in terms of the Act. On appeal by the banks, the appellate authority did not accept the contention of the banks. In the second appeal before the Tribunal, the Tribunal ruled that interest on securities cannot be brought to tax but only the interest on loans and advances is admissible (exigible) to tax under the provisions of the Interest-tax Act. To come to this conclusion, the Tribunal has chosen to consider various provisions of various enactments in addition to case laws submitted by the parties. Before us almost same or similar arguments are advanced by parties. The Revenue would invite our attention to the definition of interest in view of Section 2(7). The Revenue would say that earlier the definition specifically excluded in terms of Section 7(1) of the Act, but now the definition has been amended and in terms of the amended definition, there is no specific exclusion and that, therefore, the intention of the legislature is to exclude the excluded interest. The Revenue would further argue that this argument is supported by a notification 'issued under Section 28 of the Act. The Revenue would argue that exemption has been provided with, regard to interest on securities. Therefore, according to Revenue this exemption notification would reveal a legislative intention in the matter. It is also argued before us that the Indian Securities Act defined the term Government security meaning thereby promissory notes, stock certificates and other securities issued by the Central Government or State Government. Our attention is also drawn to the Public Debts Act, 1944, and in particular to the definition in Section 2 of the Act. Learned counsel further invites our attention to the dictionary meaning of loans to say that the Department is right in reopening and in taxing the interest on securities.
17. Sri Sarangan, learned senior counsel appearing for the banks would say that the intention of the legislature cannot be inferred in the way in which it is sought to be argued by the Revenue. He would further say that security stands on a different footing as compared to loans. He also relies on several judgments in support of his submission.
18. In the light of the rival submissions, we are required to see the definition in terms of the Interest-tax Act. Sec. 2(7) prior to substitution read 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 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;"
The said section substituted by Finance (No. 2) Act, 1991, read as under :
"2(7) 'Interest' means interest on loans and advances made in India and includes- .
(c) commitment charges on unutilised portion of any credit sanctioned for being availed in India; and
(d) discount on promissory notes and bills of exchange drawn or made in India, but does not include-
(i) any amount chargeable to income-tax under the provisions of IT Act, under the head 'Interest on securities';
(ia) 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; and
(iii) ...
(iv) ...
(v)..."
The definition of securities in terms of Section 2(a) of the Indian Securities Act, 1920 reads as follows :
"2(a). 'Government securities' mean promissory notes, (including treasury bills) stock certificates, bearer bond and all other securities issued (Central Government) at any time or by the Government of any part a State before 1st Nov., 1956 or by any State Government on or after that date in respect of any loan contracted either before or after the passing of this Act, but does not include a currency note; and"
The definition of securities as found in Public Debt Act would read as under:
"The Government security would mean security created and issued by the Government for the purpose of raising a public loan and having one of the following forms...."
From a reading of this definition what is clear to us is that under the Public Debts Act, the security takes its birth on account of public loan. Public loan can be equated to a mother and security is to be equated to a child. The mother and child are two independent entities despite the birth by the mother. At this stage, we must also see the difference between loans and advances vis-a-vis securities created for the purpose of loans by the banks. In the case of loans and advances, interest is made over, whereas, in the case of securities, interest is received by the bank. They are also shown separately in the books of account maintained as per relevant statute. The Tribunal after noticing all these aspects in our view has come to a right conclusion that interest on securities is not includible in Section 2(7) of the Interest-tax Act.
19. We may also notice various case laws cited before us by the parties with regard to this aspect of the matter.
In CIT v. Lakshmi Vilas Bank Ltd. , Madras High Court has considered as to how debenture interest was not interest on 'loans and advances':
"If the interest is on loans and advances, then such interest is taxable under the Interest-tax Act. But if the interest received by the assessee on debentures is considered to be received on securities, then such interest would not be liable to be taxed under the Interest-tax Act. From the way in which the assessee-company treated the interest received on debentures as per the provisions of section 29 of the Banking Regulation Act, and showing .the same under the head 'Investment' and not under the head 'Loans and advances' in the balance sheet, since the assessee is compelled to make a certain percentage in the approved securities in the stated institutions, from the point of view of the assessee, the Tribunal held that the interest on debentures would amount to interest on securities, and, therefore, goes beyond the purview of the provisions of the Interest-tax Act. Therefore, according to the Tribunal, the interest on debentures cannot be considered as interest on loans and advances. In view of the definition given by various authorities with regard to 'debenture', we have to come to the conclusion that the debentures are also in the nature of securities. Under such circumstances, we are accepting the finding given by the Tribunal that interest on debentures is interest on investment. The contention of the Department was that while ascertaining the character of the interest received on debentures, one should consider the Interest-tax Act and not the Banking Regulation Act for charging the interest under the Interest-tax Act. However, according to the assessee they are bound by the Banking Regulation Act in the matter of maintaining the balance sheet and in the balance sheet, as per Section 29 of the Banking Regulation Act and in accordance with the Third Schedule therein, the assessee-bank has got to make investments to permissible percentage and enter the same under the head 'Investment' even though there are other heads in the balance sheet like advances and loans, etc. As per the decision reported in Delhi Stock Exchange Association Ltd. v. CIT (1961) 41 ITR 495 (SC), the entries made in the balance sheet or in the account books by the assessee would not be conclusive in the matter of ascertaining the character of the entries made therein. But we have got to see the facts arising in each case while ascertaining the character of the entries made in the balance sheet or in the account books. In the present case, the assessee-bank had an obligation to follow the Banking Regulation Act; at the same time, the assessee is also answerable to the IT Act while submitting his return. The IT Act did not define 'debentures'. To understand the meaning of the word 'debentures' we have to depend upon various other enactments as mentioned hereinbefore. Considering those aspects and the fact that the assessee is also obliged to follow the provisions of the Banking Regulation Act...."
The Bombay High Court has considered a similar issue in Discount & Finance House of India Ltd. v. S.K. Bhardwaj, CIT and Ors. and it has ruled as under :
"... the Act is enacted for two-fold purposes, namely as an anti-inflationary measure and, secondly, to augment the revenue. In the said judgment of the Division Bench of this Court in the case of Unit Trust of India v. P.K. Unny, ITO , it has been held that interest-tax is a special tax. It operates as an indirect levy on the borrower. This is indicated by Section 26C of the Act which lays down that a lender can modify the existing agreement so as to pass on the burden of interest-tax to the borrower. Therefore, keeping in mind the object and the scheme of the Act we have to interpret Section 2(7) of the Interest-tax Act, 1974, which defines 'interest' to mean interest on loans and advances including commitment charges, discount on promissory notes but excluding discount on treasury bills. If one reads Section 2(7) of the Act, it is clear that an instrument which passes on the burden of interest-tax to the borrower is excluded from the definition of the word 'interest' in Section 2(7) like in the case of discount on treasury bills because, in such cases, the Government is the borrower. Further, loans and advances as a concept are different and distinct from investments in the commercial sense as also in the accounting sense as also under ss. 370 and 372 of the Companies Act as also under Section 29 r/w Sch. III of the Banking Regulation Act, 1949, as also under Section 13(l)(d) and Section 11(5) of the IT Act. Similarly, the definition of the word 'interest' in Section 2(28A) of the IT Act vis-a-vis Section 2(7) brings out the difference between lending on the one hand and investment on the other hand. Therefore, one has to read Section 2(7) in the context of the scheme of the Act and, if so read, it is clear that gross interest on Dated Government Securities received by the petitioner from the RBI amounting to Rs. 15,69,41,050 cannot fall under Section 2(7) of the Interest-tax Act."
The Court has further noticed as under :
"In the present case, if one construes Section 2(7) in the context of the object of the Act and the scheme of the Act, it is clear that the main Section 2(7) applies only to loans and advances and not to the gross amount of interest received from the RBI on Dated Government Securities and that deletion of the exclusionary clause by the Finance (No.2) Act of 1991 had no effect on Section 2(7) as the exclusionary clause was only clarificatory in nature. Therefore, there is no merit in the argument advanced on behalf of the Department. Moreover, Section 2 is a definition section. It starts by the expression 'in this Act, unless the context otherwise requires'. Sec. 2(7) forms part of the definition section. It defines the. word 'interest' to mean interest on loans and advances. Sec. 2(7) must be read with the expression 'unless the context otherwise requires'. Sec. 26C provides evidence of the expression 'unless the context otherwise requires'. Therefore, Section 26C demolishes the argument of the Department that the word "interest" means interest on Dated Government Securities. One has to read Section 2(7) with Section 26C and, if so read, interest received from the RBI on Dated Government Securities will not fall within the meaning of the expression 'interest on loans and advances' under Section 2(7) of the Act. Accordingly, we hold that the Department was not entitled to levy interest-tax on Rs. 15,69,41,050 received from the RBI during the year 1993-94 on Dated Government Securities as it would mean levy of tax indirectly on the RBI under Section 26C of the Act."
In CIT v. United Western Bank Ltd. a similar question was again considered by the Bombay High Court and it was ruled as under :
"In our view, the judgment of the Supreme Court in CIT v. Madurai Mills Co. Ltd. applies to this case. In our case also, the main Section 2(7) of the Interest-tax Act shows that the word 'interest' meant interest on loans and advances and not interest on securities/ debentures and, therefore, the deletion of the exclusionary clause by the Finance (No. 2) Act of 1991 had no consequence on the main Section 2(7). Therefore the exclusionary clause which existed prior to 1st Oct., 1991, was only clarificatory in nature."
The Allahabad High Court in CIT v. Sahara India Savings & Investment Corporation Ltd. (2003) 264 ITR 646 (All), after a detailed discussion ruled at p. 652 reading as under :
"In our opinion, the only correct interpretation of this provision can be that firstly nothing is interest except interest on loans and advances. Secondly, two other categories are also included in the definition of the word 'interest' as specified in cls. (a) and (b) of Section 2(7). In our opinion, the word 'means' can only have one meaning, that is, it is an exclusive definition vide P. Kasilingam v. PSG College of Technology (1995) Supp. 2 SCC 348. When we say that a word has a certain meaning then by implication we mean that it has no other meaning vide Punjab Land Development & Reclamation Corporation Ltd. v. Presiding Officer, Labour Court . However, when certain other categories are added then it means that only those additional categories will be included within the definition and none others, vide Mahalakshmi Oil Mills v. State of AP ."
Again at p. 653 the Court has held as under :
"The Supreme Court observed that the word 'includes' in the above definition is used to enlarge the meaning of the preceding words and it is by way of extension, and not for restriction. In fact this is precisely the meaning, which we are giving to the word 'interest' in Section 2(7) of the Interest-tax Act. The word 'includes' used there also enlarges the meaning of the preceding words, that is to say, the word 'interest' means interest by way of loans and advances, and two other items also. However, the enlargement of the definition is only to the extent mentioned in the definition itself, and no further. Hence we do not agree with the submission of learned counsel for the appellant that the natural meaning of the word 'interest' must be given to it. It may be mentioned that legal fictions are well known in law. A statute often defines something which is different from the meaning, which it has in common parlance."
It was further ruled as under :
"The new definition of Section 2(7) defines interest only to mean interest on loans and advances. No doubt two other categories have also been included i.e., commitment charges on unutilised portion of any credit sanctioned for being availed of in India and discount on promissory notes and bills of exchange drawn or made in India. We are not concerned with these two additional categories in the present case. Hence, in our opinion, 'interest', in the new Section 2(7) only means interest on loans and advances, and we cannot give it an extended meaning as contended by learned counsel for the appellant."
20. From all these judgments what is clear to us is that the Act is enacted not only to arrest the inflationary trends but also to augment the revenue. The same is accepted by the Bombay High Court. It is also seen that the deletion has no effect on the main Section 2(7) as held by the Bombay High Court in (supra). It is also clear to us that the word 'include' used therein enlarges the meaning of the preceding words, that is to say, the word 'interest' means interest by way of loans and advances and two other items also, in terms of the Allahabad High Court judgment in (2003) 264 ITR 646 (All) (supra).
21. In the light of the definition in terms of Section 2(7) of the Interest-tax Act, and in the light of the purpose behind the Act and also in the light of three detailed judgments, we are clear in our mind that the Tribunal is right in coming to a conclusion that the interest on securities is not taxable under the Act.
22. Before concluding, we must also refer to a latest judgment of the Supreme Court in AIR 2005 SCW 3540. The Supreme Court has considered the word 'means' in the said judgment and ruled as under :
"Generally when the definition of a word begins with 'means' it is indicative of the fact that the meaning of the word has been restricted; that is to say, it would not mean anything else but what has been indicated in the definition itself....
Therefore, unless there is any vagueness or ambiguity, no occasion will arise to interpret the term in the manner which may add something to the meaning of the word which ordinarily does not mean by the definition itself, more particularly, where it is a restrictive definition."
This judgment of the Supreme Court would support the banks in the case on hand.
23. We add that interpretation of statute particularly fiscal statute, has to be strict and nothing can be read into the statute resulting in destroying the legislative intention in terms of the well settled principles of law. The law of interpretation of statute also would support the assessees in the given circumstances. Second question is also answered in favour of the banks.
24. In the result, the two questions referred to above in this reference are answered in the affirmative i.e., in favour of the banks and against the Revenue. No costs.