Income Tax Appellate Tribunal - Bangalore
Karnataka Bank Ltd. vs Deputy Commissioner Of Income-Tax on 27 August, 1997
ORDER
Smt. P.K. Ammini, J.M.
1. The above appeals, by the assessee, pertaining to the asst. yrs. 1993-94, 1994-95 and 1995-96, involve a common issue. They are, therefore, heard together and are being disposed of by this common order for the sake of convenience.
2. The only issue involved in these appeals is whether interest on securities is chargeable to interest-tax under the provisions of the Interest-tax Act, 1991, or not.
3. The facts leading to these appeals are that the assessee is a banking company within the meaning of s. 5(b) and (c) of the Banking Regulation Act, 1949. In the assessment years under consideration, the assessee had not included interest received on securities/bonds/debentures. During the accounting year relevant to the asst. yr. 1993-94, the gross interest on securities received by the assessee was Rs. 28,30,56,923 for the next year, i.e., asst. yr. 1994-95, the gross interest received by the assessee amounted to Rs. 33,61,59,314 and, for the third year, i.e., asst. yr. 1995-96, such gross receipts were to the tune of Rs. 47,72,89,625. Since the assessee had not included the above interest in its returns, for the three assessment years under consideration, the AO issued a letter, dt. 17th January, 1996, to explain why interest earned on securities should not be included in the chargeable income of the assessee. The reply of the assessee, through a letter dt. 22nd January, 1996, was to the following effect :
"You have made your proposal by equating loans and advances to securities and debentures. This proposal is not correct as various forums including the Courts have held that loans/advances are different from securities/debentures. Hence, we strongly object to the proposal and request you to drop the same in completing the assessment and oblige."
During the personal hearing before the AO also, the assessee's learned representative contended that interest on securities could not form part of chargeable interest. But, according to the AO, securities/bonds issued by the Government of India or State Governments are in the nature of loans and advances : that the securities are nothing but bonds guaranteed by the respective issuing authorities; that the monies received by the Government thus are classified as 'debt'; that the Govt. borrows amounts from its nationals and corporate bodies; that whenever the Govt. decides to borrow from the public, it issues advertisements in the media for the purpose of getting loans from public; that the Govt. also notifies the issue of loans and invites applications for subscriptions to the notified loans; that the notifications also stipulate the terms and conditions; that merely because they are called securities, it would not alter the character of the transaction, namely, loan transaction. In view of the above nature of the securities, the AO concluded that since all the essential conditions and characteristics of a loan were present in the above kind of transaction, interest received on such securities will have to be treated as interest on loans and advances in accordance with s. 2(7) of the Interest-tax Act.
In regard to debentures, the AO was of opinion that debenture was a document which either created or acknowledged a debt. According to s. 2(12) of the Companies Act, debenture included debenture stock, bonds and any other securities of the company whether constituting a charge on the assets of the company or not. The AO also referred to the 'Guide to the Companies Act', 10th Edn., p. 18 of Shri A. Ramaiah and came to the conclusion that debentures were also in the nature of loans raised by the companies. He also referred to the definition of 'interest' as found in s. 2(7) of the Interest-tax Act, and, according to him, sub-cl. (i) which existed earlier to 1st October, 1991, specifically excluded interest on securities from the purview of 'interest'. Subsequently, the exclusionary clause was omitted. According to the AO "this omission is not without significance". As per the AO the word 'interest' includes interest on debentures, bonds, securities, etc. He also found that a notification under s. 28 has been issued by the Government of India on 11th September, 1995, to exclude interest on securities from the purview of chargeable interest w.e.f. financial year 1995-96 and this was done on the recommendations of the RBI which, according to the AO, meant that even the RBI had tacitly agreed that interest on securities was chargeable to interest-tax for the assessment years under consideration. Accordingly, the AO brought to tax the interest received by the assessee on securities in the sums mentioned in para 3 for all the years under consideration.
4. As against the above inclusion, the assessee appealed. It was contended before the CIT(A) that the interest on securities was not a specie of interest on loans and advances and since only the latter was chargeable to tax, the income from interest on securities was outside the scope of chargeable interest. In the written submissions filed before the CIT(A) it was also contended that purchase of securities represented an investment and was not a loan; that securities were transferable whereas loans were not; that the provisions of s. 26C of the Interest-tax Act enabled a credit institution to vary certain agreements in order to pass on the burden of interest-tax and such a revision was unworkable in the case of securities. The learned representative of the assessee brought to the notice of the CIT(A) a decision of the Madras Bench of the Tribunal in the case of Lakshmi Vilas Bank, in ITA No. 5/Mds/79, dt. 28th March, 1980, according to which interest on debentures which was akin to securities did not partake the character of interest on a loan. The CIT(A) distinguished the decision of the Madras Bench of the Tribunal. On the other hand, he placed reliance on the decision of the Hon'ble Supreme Court in the case of State Bank of India vs. CIT (1986) 157 ITR 67 (SC), wherein it was held that the entries made by an assessee were not determinative of the nature of a transaction. Following the above decision of the Supreme Court, the CIT(A) held ".. it would be clear that merely because the appellant bank chooses or is required to disclose investments in securities under the head "Investments" rather than "loans and advances", it cannot be presumed that, that classification is conclusive of the matter. In the light of the decision of the Supreme Court the Hon'ble Tribunal, Madras Bench would appear to have adopted a line of reasoning which has been disapproved by the cited decision of the Supreme Court rendered in 1985". Finally, the CIT(A) held that interest on securities is chargeable to interest-tax. Hence, these further appeals by the assessee.
5(a). The question that arises for our consideration in these appeals is whether interest on securities in chargeable to tax under the provisions of the Interest-tax Act. Before proceeding further, we would refer to the history of this legislation. The Interest-tax Act was first introduced in the year 1974. In the Parliament, the then Finance Minister made a speech on 31st July, 1974, thus :
"I shall now explain my tax proposals, dealing first with proposals in the field of direct taxes. As a part of the anti-inflationary package, I propose to levy a tax on the gross amount of interest received by scheduled banks on loans and advances made in India. The banks would be expected to adjust their functioning to this tax and reimburse themselves to the extent necessary by making appropriate adjustments in interest rate charges from borrowers. The proposed tax will have both a monetary and a fiscal impact in that it will serve the purpose both of raising the cost of borrowed funds and of supplementing Government revenues. The proposed tax will be levied at the rate of 7 per cent of the gross amount of interest earned by the banks. This would imply on an average an increase of about 1 per cent in the cost of borrowing from the banks. Interest on Government securities, as also debentures and other securities and statutory corporations will not be included in the tax base. Interest received on transactions between scheduled banks will likewise be exempted from the proposed levy."
"Interest" was defined under s. 2(7) of the 1974 Act as follows :
"(7) '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 note and bills of exchange drawn or made in India, but does not include :
(i) any amount chargeable to income-tax under the IT Act, under the head 'Interest on securities'; and
(ii) discount on treasury bills."
This Interest-tax Act of 1974 was withdrawn in 1978. It was reintroduced in 1980. When the 1980 Act was introduced, the then Finance Minister, made the following speech on the date of presentation of the budget, as follows :
"An upward adjustment of lending rates should moderate the inflationary pressures in the economy. I accordingly propose to revive interest-tax in relation to interest earned by scheduled commercial banks after 30th June, 1980. The scope of the levy is being extended to cover also interest received by the larger all India industrial finance institutions, namely, IDBI, ICICI, IFCI and IRCI. The tax will be levied at the rate of 7 per cent. On the chargeable amount of interest as in the past. This measure will yield Rs. 217 crores in a full year and about Rs. 108.5 crores in the year 1980-81."
This Act of 1980 was withdrawn in the year 1985. Yet again, it was revived in 1991. On that occasion, the then Finance Minister made the following speech :
"In view of the binding fiscal constraints and the need to mobilise resources, I propose to revive the interest-tax which was first introduced in 1974 and withdrawn in 1978, reintroduced in a modified form in 1980 and finally withdrawn in 1985. I am enlarging, slightly, the coverage of this tax. The new tax will be levied on the gross amount of interest received by all banks, financial institutions and non-banking financial companies in the corporate sector or loans and advances made in India. These institutions would reimburse themselves by making necessary adjustments in the interest rates charged from borrowers. The proposed tax is expected to raise the cost of borrowing and yield revenue to the Government. It should, therefore, have both monetary and fiscal impact."
5(b). The term "banking" has been defined to mean "accepting for the purpose of lending or investing or depositing of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise."
5(c). It is contended by the learned representative of the assessee that the authorities below erred, both in law and on facts, in holding that interest on securities, debentures is interest on loans and advances made in India and is taxable under the provisions of Interest-tax Act. They grossly erred in equating interest on loans and advances to interest on securities/debentures. Interest on loans and advances and interest on securities are two distinct and separate receipts and they cannot be equated with each other. Merely because interest on securities is not specifically excluded from the purview of the Interest-tax Act, 1991, it cannot be said that interest on securities has to be treated similar to that of interest on loans and advances. To clarify this position, the learned representative of the assessee drew our attention to the speech of the Finance Minister at the time of presentation of the budget of 1991. He stated that the Finance Minister, while presenting the Budget and introducing again the Interest-tax Act, has not specifically stated that interest on security has to be brought to tax. But still, it is brought to tax. If the Parliament wanted to include 'interest on securities', there was no difficulty for it to include 'interest on securities' specifically bringing the same within the purview of definition of "interest" in the Act of 1991. As it has not been specifically included in the definition of 'interest' in the Interest-tax Act, it shows that the Parliament does not want to include 'interest on securities' within the purview of Interest-tax Act. It is contended that the speech of the Finance Minister on this point has to be read as a whole and it is not fair to pick up sentences from here and there and draw conclusions basing on such sentences. He further contended that if the definition is not clear, then the object of the Act has to be looked into. He placed reliance on the definition of the word 'interest' in s. 2(13) of the Interest-tax Act. According to the learned representative of the assessee, this definition is not an inclusive one but an exhaustive definition. For this purpose, he placed reliance on the decision of the Hon'ble Supreme Court in the case of P. Kasilingam & Ors. vs. P.S.G. College of Technology & Ors. AIR 1995 SC 1395 and also in the case of Mahalakshmi Oil Mills vs. State of Andhra Pradesh & Ors. (1989) 1 SCC 164. The learned representative brought to our notice the clear distinction between 'loan' and 'deposit' by referring to the decision reported in AIR 1973 Lah 81. He also brought to our notice the distinction and clear distinction between the words "securities" and "loans and advances". He contended that interest receipts from 'securities' and 'loans and advances' are of different nature coming from two different branches of the fork. All Government securities are negotiable and transferable. In the case of 'loans and advances' they are not negotiable or transferable. Securities can be purchased but 'purchase' is absent in the case of loans and advances. 'Security' is a property. Further, under the Banking Regulations Act, the banks are required to show 'securities' as investments in India in the balance sheets. In this case also, the assessee has produced the balance sheet wherein the Government securities are shown as 'Investment'. It is further contended that interest on securities is collected by the banks in the course of business. Interest on Govt. securities is fixed by the Government and the banks have no choice either to claim or allow. Interest on securities given by the Government and the accretions on the same are receivable by the Government. Therefore, the net effect will be 'zero'. In case of 'loans and advances' the banks have a chance. 'Investment' is considered as fixed deposit and not a current deposit. The 'investment' is valued but the 'loans and advances' cannot be valued. The learned representative of the assessee also relied on the decision of the Madras High Court in the case of CIT vs. Lakshmi Vilas Bank Ltd. for the proposition that debentures in the nature of securities cannot be taxed under the provisions of Interest-tax Act.
5(d). The learned Departmental Representative contended that in the definition of 'interest' in s. 2(7) of the Interest-tax Act, 1991, interest on securities is omitted to be excluded from the purview of the definition and, therefore, the interest on securities has to be brought to tax under the Interest-tax Act. He contended that under the provisions of Public Debt Act, 1944, all the Government securities are nothing but loans. When Government securities are treated as loans taken by the Government they cannot be treated as otherwise for the purpose of taxability under Interest-tax Act. Therefore, interest on securities is also taxable under the provisions of Interest-tax Act as 'securities' are nothing but 'loans'. It is pointed out that the RBI is the controlling authority to issue securities. The assessee also will come under the control of the RBI. He also pointed that s. 28 of the Interest-tax Act is introduced for the purpose of exemptions. He also took us through the history of the Interest-tax Act. He contended that in the 1974 Act, interest on securities was exempted from taxability specifically but in the 1991 Act this exemption ceases to find a place. He contended that when words are clear and unequivocal no external aid can be sought. For this purpose, he placed reliance on two decisions of the Hon'ble Supreme Court of India - one in the case of Anandji Haridas & Co. (P). Ltd. vs. Engineering Mazdoor Sangh & Anr. (1975) 99 ITR 592 (SC) at p. 595 and the other in the case of Keshavji Ravji & Co. vs. CIT (1990) 183 ITR 1 (SC). According to the learned Departmental Representative, a speech of the Finance Minister cannot be relied on for the purpose of clarification of definition of 'interest' as defined under the provisions of the Interest-tax Act, 1991. The learned Departmental Representative distinguished the decision of the Madras High Court in the case of Lakshmi Vila Bank Ltd. (supra) on the ground that that was a case relating to 'debentures' and not to 'securities'. He referred us to s. 6(2) of the Companies Act, according to which 'debenture' is a loan and is unsecured. He contended that the decision of the Madras High Court is under the Interest-tax Act of 1974 wherein there is specific exemption of interest on securities from the purview of the Interest-tax Act. Finally, he concluded by stating that the authorities below are justified in bringing to tax the interest received on securities under the Interest-tax Act.
5(e). We have heard the rival submissions. The question that arises for our consideration is whether interest on securities is chargeable to tax under the Interest-tax Act. According to the learned representative of the assessee as per the definition of 'interest' in s. 2(7) of the Interest-tax Act, 'interest on securities' is not includible. For this, he places reliance on the expression of the words "means" and "includes". He contends that "means" and "includes" in the definition of 'interest' in the Interest-tax Act is exhaustive. For this, he relies on the Supreme Court decision reported in (1989) 1 SCC 164 (supra). It is held therein "the definition under consideration which consists of two separate parts which specify what the expression means and also what it includes is obviously meant to be exhaustive". In that case, the question was whether tobacco seeds were exempt from the definition contained in the A.P. General ST Act, 1957. The Hon'ble Supreme Court stated thus :
"Before us, it is urged on behalf of the assessee that the word 'tobacco', in its ordinary connotation, takes in the tobacco plant and every part of it, including the seed. The definition also makes it clear that it takes in every form of tobacco, manufactured or un-manufactured. Thus, tobacco seeds, not only when they are in their raw un-manufactured state but also when, on manufacture, they manifest themselves in the form of tobacco seed oil or tobacco seed cake will fall within the definition. On the other hand, on behalf of the State it is submitted that the definition, which is submitted that the definition, which covers both what the expression means as well as what it includes, is exhaustive. Tobacco seed does not come within the first part of the definition, for the expression 'tobacco' cured or uncured, manufactured or un-manufactured has to be read as a whole and will not take in tobacco seed. It will not come under the second part because it specifically mentions leaves, stalks and stems but leaves out seeds. Since tobacco seeds do not fall within the definition, the oil and cake produced by the crushing of the seeds will not also be covered by the definition or eligible for the consequent exemption."
5(f). The learned representative of the assessee, as stated earlier, relied on the decision of the Supreme Court in the case of P. Kasilingam (supra), according to which the use of expression "means and includes" indicates that the definition is exhaustive are not extensive. It is the contention of the learned representative of the assessee that the definition given in the case of 'tobacco' by the Supreme Court is identical to the expression "means" and "includes" in the definition of 'interest' in s. 2(7) of the Interest-tax Act. To quote the section :
"'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."
It is true that in the definition of 'interest' in the 1974 Act, the interest on securities was specifically exempted from the definition but not so exempted in 1991 Act. We agree with the contention on behalf of the assessee that if the words and phrases are not clear and definite, one has to go to the objects and reasons of the Act. We have gone through the speech of the Finance Minister while presenting the Budget for 1991. There he has proposed to revive the interest-tax which was first introduced in 1974 and withdrawn in 1978, reintroduced in a modified form in 1980 and finally withdrawn in 1985 and he introduced in 1991. He has stated therein that he is enlarging, slightly, the coverage of this tax and that the new tax will be levied on the gross amount of interest received by all banks, financial institutions and non-banking financial companies in the corporate sector on loans and advances made in India. It can be seen that the Finance Minister has not specifically stated whether interest on securities is includible or not but has only stated "in the corporate sector on loans and advances made in India". Therefore, as rightly pointed out by the learned representative of the assessee, if Parliament wanted to include interest on securities in the definition of 'interest', there would have been no difficulty for them to do so. Merely because it is omitted to be mentioned, according to us, it does not mean that the Parliament wanted to include interest on securities within the purview of the Act. But, it is contended on behalf of the Revenue, that when words and expressions are clear, one need not go to the objects and reasons of the Act to clarify the position. He also relied on the decision of the Supreme Court in Keshavji Ravji & Co.'s case (supra). We have gone through the judgment. It is held therein :
"As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the legislature cannot then be appealed to, to whittle down the statutory language which is otherwise unambiguous. If the intendment is not in the words, it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the legislature.
When words acquire a particular meaning of sense because of their authoritative construction by superior Courts, they are presumed to have been used in the same sense when used in a subsequent legislation in the same or similar context.
To the extent not prohibited by the statute, the incidents of the general law (of partners) are attracted to ascertain the legal nature and character of a transaction. This is quite apart from distinguishing the 'substance' of the transaction from its 'form'. The Court is not precluded from treating what the transaction is in point of fact as one in point of law also."
The learned Departmental Representative has also relied on the decision of the Supreme Court of India in the case of Anandji Haridas & Co. (P) Ltd. (supra). He particularly referred to the observations of their lordships at p. 595 of the report. The observations are to the following effect :
"As a general principle of interpretation, where the words of a statute are plain, precise and unambiguous, the intention of the legislature is to be gathered from the language of the statute itself and no external evidence such as Parliamentary Debates, Reports of the Committees of the legislature or even the statement made by the Minister on the introduction of a measure or by the framers of the Act is admissible to construe those words. It is only where a statute is not exhaustive or where its language is ambiguous, uncertain, clouded or susceptible of more than one meaning or shades of meaning, that external evidences as to the evils, if any, which the statute was intended to remedy, or of the circumstances which led to the passing of the statute may be looked into for the purpose of ascertaining the object which the legislature had in view in using the words in question."
The argument of the learned Departmental Representative, basing on the decisions in Keshavji Ravji & Co. vs. CIT (supra) and Anandji Haridas & Co. Ltd. vs. Engineering Mazdoor Sang & Anr. (supra), that when words and expressions are clear one should not go to the objects and reasons of the Act to clarify the position, cannot be accepted here. It cannot be categorically stated that there is no ambiguity in regard to taxability of interest on securities. In the definition of 'interest' in the Interest-tax Act, 1991, 'interest on securities' has not been mentioned at all and is silent while in the 1974 Act it was specifically excluded. Therefore, one can look into the speech of the Finance Minister to see whether the definition takes in its stride 'interest on securities' also. Following the decision of the Supreme Court holding that the expression "means" and "includes" in the definition is exhaustive and not extensive, we hold that the definition of 'interest' in the Interest-tax Act, 1991, does not take in interest on securities also.
5(g). 'Loans and advances' according to the submission of the learned representative of the assessee, are different from 'securities'. The contention of the assessee is that security is an investment which produces revenues. Interest on securities is negotiable and transferable while in the case of 'loans and advances' both these elements are absent. In order to support his contention, the learned representative of the assessee referred us to different dictionary meanings of the words 'loans and advances' and 'securities'.
5(h). "Advance", as per Virtue's New English Dictionary, means "to put forward; to promote to a higher office; to encourage the progress of; to propose; to supply or pay beforehand; to move or go forward; to make progress; to rise in rank or in value - progress; improvement; a rise in price or value; payment before hand; a loan; approach; overture with a view to an understanding; supplied; in advance."
5(i). As per 'A Dictionary of Legal Terms' by Shri Vinod K. Agarwal, 'Advance' means : "To pay money or render other valuable before it is due; to furnish something before an equivalent is received, to loan. The word 'Advance' does not connote any idea of repayment".
5(j). "Advance", as defined in the 'Law Dictionary' by P. H. Collin, IInd Edn., means :
"noun (a) money paid as a loan or as a part of payment which is to be completed later; a cash advance; to receive an advance from the bank; an advance on account; to make an advance of $100 to someone (b) in advance - early; before something happens; to pay in advance ....."
5(k). "Loan" means : "anything lent, money at interest; the act of lending, permission to use - to lend."
as per Virtue's New English Dictionary.
5(l). "Loan", again, as per the book of 'Dictionary of Law by L. B. Curzon, 4th Edn., means :
"used in Cos. A 1985 to describe a transaction under which one party (the 'creditor') agrees to pay, or pays otherwise than in pursuance of an agreement, a sum for another (the 'borrower'), or agrees to reimburse, or reimburse otherwise than in pursuance of an agreement, expenditure incurred by another party for another (the 'borrower'), on terms that the borrower (or a person on his behalf) will reimburse the creditor, or in circumstances giving rise to a liability on the borrower to reimburse the creditor; s. 331(3). In general, a non-private company may not make a quasi-loan to any of its directors."
5(m). The learned representative of the assessee also places reliance on the meaning of the word "investment". "Investment", as defined in the above dictionary, means :
"The verb 'to invest' when used in an investment clause may safely be said to include as one of its meanings 'to apply money in the purchase of some property from which interest or profit is expected and which property is purchased in order to be held for the sake of the income which it will yield". Generally, the term means the laying out of money with a view to earning an income from it, by way of interest, dividend, rent, etc., under F.S.A. 1986, Sch. I. 'Investments' comprise assets, rights, interest (including shares, debentures, Government and other public securities, long-term insurance policies, etc."
5(n). Mr. P. H. Collin, in the book 'Law Dictionary', 2nd Edn., describes "Investments" - as - non - placing of money so that it will increase in value and nonunproduce an income (either in an asset, such as a building, or by purchasing shares, placing money on deposit, etc.).
5(o). In the book 'Guide to the Companies Act', 12th Edn., Shri A. Ramaiah, describes "Investment" thus :
"The expression means the laying out of money in such a manner that it may produce a revenue, the usual method being the purchase of shares, stocks, securities or other property. All loaning of money at interest is not investment. The loaning must be in the nature of a laying out of money either in the purchasing, acquiring or securing of some interest by way of mortgage or otherwise in property, tangible or intangible or in a business enterprise. A mere lending or deposit of money will not be investment. It must, in some way, be related to property so as to earn an income for a reasonable length of time."
5(p). It is contended by the learned representative of the assessee that government securities are investments which are assets held by an entry for earning income by way of dividends, interest, rentals for capital appreciation or for other benefits to the investing entity. Investments are classified as 'current investments' and 'long-term investments'. A current investment is an investment that is, by its nature, readily realisable and is intended to be held for not more than one year from the date on which such investment is made. A long-term investment is an investment other than a current investment. Investments constitute a significant portion of the total assets of certain entities like banks, insurance companies, investment companies, trusts, etc. In other cases, the nature, quantum and type of investments may vary from case to case.
5(q). The learned representative of the assessee also referred us to the meaning of 'securities' given in different dictionaries. As per Dictionary of Law by Mr. L. B. Curzon, 4th Edn. 'Securities' are : (1) Things deposited or pledged to ensure the fulfilling of an obligation. (2) Written evidence of ownership, e.g., certificates. (3) Under CCA 1974, s. 189(1), in relation to an actual or prospective consumer credit of hire agreement, a security is a mortgage, charge, pledge, bond, debenture, indemnity, guarantee, bill, note or other right provided by the debtor or hirer to secure the carrying out of obligations under the agreement, Transport Act, 1985, s. 137(1) under which 'securities' in relation to a body corporate, means any shares, stock, debentures, debenture stock, and any other security of a similar nature, of that body.
5(r). As per 'Law Dictionary' by P. H. Collin, 2nd Edn., 'Securities' means :
"Plural noun (i) investments in stocks and shares; (ii) certificates to show that someone owns stock; gilt-edged securities or government securities - British Government stock; the securities market - Stock Exchange or place where stocks and shares can be sold; securities trader - person whose business is buying and selling stocks and shares."
5(s). The General Clause Act, 1897, defines 'Government Securities' - per s. 3(24) - as follows :
"Government Securities shall mean securities of the Central Government or of any State Government, but in any Act or Regulation made before the commencement of the Constitution shall not include securities of the Government of any part B State."
5(t). It is also pointed out by the learned representative of the assessee that under the provisions of s. 29 of the Banking Regulations Act, the banks are directed to show the securities in the balance sheets as 'Investments' in Sch. B whereas loans and advances are shown separately in Sch. A of the balance sheet.
5(u). A reading of the above makes it clear that the terms 'loans and advances' are different from the term 'securities' and that 'securities' are investments whereas 'loans and advances' do not fall under that category.
6(a). Now, we come to the charging section. In the Interest-tax Act, s. 4 is the charging section. The section reads as under :
4(1). "Subject to the provisions of this Act, there shall be charged on every scheduled bank for every assessment year commencing on or after the 1st day of April, 1975, a tax in this Act referred to as interest-tax in respect of its chargeable interest of the previous year at the rate of seven per cent. of such chargeable interest."
The scope of chargeable interest is mentioned in s. 5, as :
"Subject to the provisions of this Act, the chargeable interest of any previous year of a credit institution shall be the total amount of interest (other than interest on loans and advances made to other credit institutions (or to any co-operative society engaged in carrying on the business of banking) accruing or arising to the credit institution in that previous year."
It is pointed out by the learned representative of the assessee that the charging section itself excludes interest on securities and interest on loans and advances made to other credit institutions. It is also pointed out by the learned representative of the assessee that under s. 26C of the Interest-tax Act, the credit institutions have power to vary certain agreements. The section reads :
"Notwithstanding anything contained in any agreement under which any term loan has been sanctioned by the credit institution before the 1st day of October, 1991, it shall be lawful for the credit institution to vary the agreement so as to increase the rate of interest stipulated therein to the extent to which such institution is liable to pay the interest-tax under this Act in relation to the amount of interest on the term loan which is due to the credit institution."
It is contended that in the case of 'securities' the banks have no choice either to claim or allow. The government is empowered to give the terms and conditions of the securities. Therefore, there is clear and distinct difference between interest on loans and advances and interest on securities. Further, the government has power to exempt any credit institution or any class of credit institutions or any interest on any category of loans and advances from the levy of interest.
6(b). The learned representative of the assessee also referred us to the notification issued under s. 28 of the Interest-tax Act, to the following effect :
"In exercise of the powers conferred by s. 28 of the Interest-tax Act, 1974 (45 of 1974), the Central Government, on the recommendation of the Reserve Bank of India, being of the opinion that it is necessary and expedient so to do having regard to the peculiar circumstances of the case and in public interest, hereby exempts the banking companies to which the Banking Regulations Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in s. 51 of that Act) from the levy of interest-tax in respect of their income from interest on securities with effect from the financial year 1995-96."
The above notification is dt. 11th September, 1995. It has to be mentioned here that the AO has not taken the above notification into consideration on the ground that it takes effect only from the financial year 1995-96.
6(c). It is pointed out by the learned representative of the assessee that under the provisions of the IT Act, interest on securities is chargeable under s. 18 but this section was deleted, w.e.f. 1st April, 1989. Secs. 18 to 21 of the IT Act, 1961, were omitted by the Finance Act, 1988, w.e.f. 1st April, 1989. Now, under the IT Act, interest on securities is chargeable under 'other sources'. Sec. 193 of the IT Act also deals with interest on securities and it is stated therein specifically that while paying the interest on securities tax has to be deducted at source.
6(d). The learned representative of the assessee has laid much stress on the decision of the Madras Bench of the Tribunal in the case of Lakshmi Vilas Bank Ltd. vs. ITO in Int. Tax Appeal No. 5/Mds/79, is held by the Madras Bench of the Tribunal 'B' therein :
".. Even interest from debentures issued by the companies will certainly be entitled to be excluded, though we are not called upon to pronounce our views on company debentures. We, however, make bold to mention this because the intentions of the government and the Parliament as are inferable from the Finance Minister's budget speech and the statement of objects and reasons show that Interest-tax Act was not intended to cover such interest."
6(e). We find that the above decision of the Tribunal was challenged by the Revenue before the Hon'ble Madras High Court. The decision of the Madras High Court is at. It is held by the Hon'ble Madras High Court that debentures are in the nature of securities and interest on debentures is interest on investment. It was held further, by the Madras High Court :
".. 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' one has to depend upon various other enactments. Considering those aspects and the fact that the assessee is also obliged to follow the provisions of the Banking Regulation Act, the conclusion arrived at by the Tribunal in holding that the interest on debentures is interest on investment is not in violation of any of the recognised meanings given to the word 'debenture' in various other enactments. Further, it also remains to be seen that the Interest-tax Act is applicable only to the interest received by the banks. In such circumstances, placing reliance on the provisions of the Banking Regulation Act in the matter of understanding the meaning of the word 'debenture' and in ascertaining the character of the interest received on debentures would not be out of context. Therefore, there is no infirmity in the conclusion arrived at by the Tribunal that interest on debentures cannot be considered as interest on 'loans and advances', liable to be taxed under the Interest-tax Act."
The objection of the learned Departmental Representative in following the above decision of the Madras High Court is on the ground that the reported decision is rendered in respect of interest on debentures and not on interest on securities. This objection cannot be sustained as we see that the High Court has stated clearly that debentures in the form of securities are exempt from the purview of definition of 'interest' chargeable on loans and advances to Interest-tax Act. It is also significant that 'debenture' also is absent in the definition of 'Interest' given in s. 2(7) of the Interest-tax Act, 1991. Another objection of the learned Departmental Representative in applying the reported decision of the Madras High Court to the present case is that that decision was rendered while the Interest-tax Act, 1974, was in force wherein the interest on securities was specifically exempt from the purview of Interest-tax Act. This objection cannot also be sustained. The decision of the Madras High Court of Lakshmi Vilas Bank Ltd. vs. ITO (supra) was delivered on 29th August, 1996, when the Interest-tax Act of 1991 was in force. As per the definition of 'Interest' under s. 2(7) of the Interest-tax Act, interest on debentures as well as interest on securities are not included in the definition.
6(f). We have already held that interest on 'loans and advances' is different from interest on 'securities'. Both the interests cannot be treated on par with each other. We are, therefore, of the opinion that interest on securities is not liable to be taxed under the provisions of the Interest-tax Act, 1991. Hence, we hold that the authorities below are not justified in bringing the interest on securities received by the assessee to tax under the Interest-tax Act in all the above three years. Their orders are reversed.
7. In the result, the appeals are allowed.