Income Tax Appellate Tribunal - Delhi
Oriental Insurance Co. Ltd. vs Deputy Commissioner Of Income Tax on 2 January, 2004
Equivalent citations: [2004]89ITD520(DELHI), (2004)82TTJ(DELHI)1084
ORDER
K.C. Singhal, J.M.
1. Since common issue is involved in these appeals, the same are being disposed of by the common order for the sake of convenience. The short issue involved in these appeals is whether the interest received by the assessee in respect of various investments and deposits made by it is chargeable to tax under the provisions of Interest-tax Act, 1974 (in short Act).
2. Briefly stated, the facts are that the assessee, which is a subsidiary of General Insurance Corporation of India, is engaged in the business of general insurance. It is governed by the provisions of the Insurance Act, 1938. The assessee is required to invest its funds only in the approved investments specified in Section 27B of this Act. During the years under consideration, the assessee received interest chargeable on various investments and deposits and filed its return of interest chargeable to tax under the Act declaring interest chargeable to tax at Rs. 16,42,34,600, Rs. 19,99,50,713 and Rs. 22,90,13,766 for asst. yrs. 1993-94, 1995-96 and 1996-97, respectively, However, the assessee had not declared interest received on the following investments and deposits ;
Interest on:
1. Deposits, bonds and securities
2. Special deposits with RBI
3. Deposit with IDBI
4. Fixed deposits with banks
5. Certificate deposits with banks
6. Stock invested with banks
7. Call money
8. Loan to DDA
9. Bills discounting schemes with banks
10. Loans to UTI According to the assessee, such interest did not fall within the ambit of 'loans' and 'advances' which is chargeable to tax under Section 5 r/w Section 2(5) and 2(7) of the Act. However, the AO was of the view that interest was chargeable to tax. Hence, he included the above interest in the interest chargeable to tax and thus, assessed the assessee on the total interest of Rs. 1,00,62,97,800 for asst. yr. 1993-94, Rs. 1,30,65,84,140 for asst. yr. 1995-96 and Rs. 1,73,73,60,660 for asst. yr. 1996-97. The assessments made by AO have been confirmed by the first appellate authority. Hence, the present appeals have been preferred by the assessee before the Tribunal.
3. The learned counsel for the assessee has submitted before us that the issue involved in the present appeals is covered in favour of the assessee by the recent decision of the Tribunal in the case of Punjab National Bank v. Dy. CIT (2003) 79 TTJ (Del) 454 : (2003) 87 ITD 11 (Del) as well as by another decision of the Tribunal in the case of Sahara India Savings & Investment Corporation Ltd. v. Asstt. CIT (2001) 73 TTJ (All) 930 : (2001) 79 ITD 56 (All), while the learned Departmental Representative has supported the orders of lower authorities by relying on the decision of the Tribunal in the case of State Bank of Hyderabad v. Dy. CIT (1998) 61 TTJ (Hyd) 678 : (1998) 66 ITD 464 (Hyd). In reply, it is submitted by the learned counsel for the assessee that the decision of Hyderabad Bench has been considered by Delhi Bench in the case of Punjab National Bank (supra) and, therefore, the assessee is entitled to succeed. Alternatively, it has been pleaded that where two views are possible then the view favourable to the assessee should be adopted.
4. At this stage, it was pointed out to the parties that these decisions are relevant only with reference to interest on debentures, bonds and securities, and not with reference to interest on various deposits made by the assessee. Hence, they were asked to argue on such aspect of the issue. The counsel for the assessee merely submitted that reasonings given by the Tribunal with reference to interest on debentures, bonds and securities would also govern the issue relating to interest on deposits. Similar arguments were made by the learned Departmental Representative by referring to the decision of Hyderabad Bench of the Tribunal.
5. Rival submissions of the parties have been considered carefully. As far as the issue relates to the interest on debentures, bonds and securities, we find that the same is squarely covered in favour of the assessee by the decision of the Tribunal, Delhi Bench, in the case of Punjab National Bank (supra) which has also taken into consideration the decision of Hyderabad Bench relied upon by the learned Departmental Representative as well as the decision of Allahabad Bench relied upon by the assessee's counsel. We further find that the view of Allahabad Bench has been accepted recently by the Hon'ble Allahabad High Court which is reported as CIT v. Sahara India Savings & Investments Corporation (2003) 264 ITR 646 (AS). Even if two views are possible, the view favourable to the assessee has to be accepted in view of the judgment of Hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC). Hence, following the decision of the Tribunal in the case of Punjab National Bank (supra), it is held that interest on debentures, bonds and securities is not chargeable to tax under the Act and consequently, the same shall be excluded from the computation of chargeable interest.
6. The real controversy to be resolved in the present appeals is whether the interest on deposits with Reserve Bank of India (RBI) and other banks is exempt from taxation under the Act. No case law has been cited by either party on this aspect of the issue except by submitting to the effect that reasonings given by the Tribunal in the cases mentioned above would also apply to the interest on deposits. Faced with such a situation, we have made our study in depth on this issue by referring to various case law and provisions of other enactments.
7. First., we will refer to the relevant provisions of the Act. Section 5, which is a charging section reads as under:
"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 cooperative society engaged in carrying on the business of banking, accruing or arising to the credit institution in that previous year.
Provided................"
The expression 'chargeable interest' has been defined in Section 2(5) as under:
'Chargeable interest' means the total amount of interest referred to in Section 5, computed in the manner laid down in Section 6."
Further, the word 'interest' has been denned in Section 2(7) 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 view of the above provisions, the case of the Revenue is that deposits with banks and other institutions would fall within the ambit of the word 'loans', while the case of the assessee is that 'loans' and 'deposits' are different expressions having different meanings and, therefore, interest on deposits is not chargeable to tax. Our study reveals that 'loans' and 'deposits' are not mutually exclusive terms inasmuch as (i) both are debts repayable; (ii) in both the cases, money passes torn one hand to another; (iii) in both the cases, there is relationship of debtor and creditor; (iv) there is a liability to return the money depending upon the terms and conditions between the parties. Still there is fine distinction between the two. In the case of deposit, it is made at the instance of the depositor whereas a loan is given at the instance of the borrower for his use with or without compensation. Consequently, a deposit is repayable only on demand by the depositor without the debtor having to seek out the creditor, while in the case of a loan, the obligation to repay is forthwith incurred (though the obligation may have to be discharged in future) and the borrower must seek out the lender to repay the loan. Even the legislature has made distinction between these two terms. Limitation Act prescribes the different period of limitation i.e., three years from the date when the loan is made while in the case of deposit, it is three years from the date when the demand is made. Even the IT Act, 1961, has made distinction between these two terms. Section 269SS prohibits acceptance of loan or deposit in cash exceeding the prescribed limit. Sec. 269T prohibits the repayment of deposit in cash exceeding the prescribed limit. It is apparent from these provisions that repayment of loan in cash is not prohibited. Consequently, no penalty is leviable under Section 271E where repayment of loan is made in cash. On the other hand, penalty is leviable under Section 271E if deposit is repaid in cash exceeding the prescribed limit. Thus, it is apparent from these provisions that even the legislature recognises the distinction between the loan and the deposit.
8. The above view is fortified by the various decisions of Privy Council, Supreme Court and High Courts. The Hon'ble Privy Council in a case reported as Mohd. Akbar Khan v. Attar Singh AIR 1936 PC 171 held as under:
"It should be remembered that the two terms ('deposit' and 'loan') are not mutually exclusive. A deposit of money is not confined to a bailment of specific currency to be returned in specie. As in the case of a deposit with a banker, it does not necessarily involve the creation of a trust, but may involve only the creation of the relation of debtor and creditor, a loan under conditions. This distinction which is perhaps the most obvious is that the deposit not for a fixed term does not seem to impose an immediate obligation on the deposit to seek out the depositor and repay him. He is to keep the money till asked for it. A demand by the depositor would, therefore, seem to be a normal condition of the obligation of the depositee to repay."
9. The distinction between 'loan' and 'deposit' was considered by the Hon'ble Madras High Court in the case of Abdul Hamid Sahib and Ors. v. Rahmat Bi AIR 1965 Mad 427. Their Lordships opined as under:
"The terms 'loans' and 'deposits' are not mutually exclusive terms. There are a number of common features between the two. In a sense a deposit is also a loan with this difference that it is a loan with something more. Both are debts repayable. But, the question as to when the repayment is to be made furnishes the real point of distinction between the two concepts. A loan is repayable the minute it is incurred. But this is not so with a deposit. Either the repayment will depend upon the maturity date fixed therefor or the terms of the agreement relating to the demand, on making of which the deposit will become repayable. In other words, unlike a loan there is no immediate obligation to repay in the case of a deposit. That is the essence of the distinction between a loan and a deposit. (Head note)."
10. The Hon'ble Madhya Pradesh High Court again considered this aspect of the matter in the case of Sharda Talkies (Firm) v. Madhu Lata Vyas AIR 1996 MP 68. After referring to the abovesaid two judgments of Privy Council and Madras High Court as well as other decisions of Supreme Court and Privy Council, their Lordships observed as under:
"There is a subtle distinction between a deposit and a loan. In the case of a loan, the amount is given by the creditor to the debtor at the request of and for the requirements and dues of the debtor under certain terms and conditions. In the case of a deposit, the depositee receives money at the instance of the depositor. In the case of a deposit, the requirement of the depositee is neither relevant not material. The depositor has to go to the depositee for depositing the amount or the depositee may go and collect the amount. But in case a loan, the debtor has to request the creditor to advance certain amount for meeting his requirement for using the amount. However, the question in a given case whether the debit is deposit or a loan will be one of fact which will have to be decided on the facts and circumstances of each case. The use of the term 'loan' or 'deposit' may not itself be conclusive, though, of course, it is a circumstance which would be taken into account. What should be regarded is the cumulative effect of the evidence which bears on the character of the debt as a loan or a deposit, Where certain amounts are paid or given by a particular person to other without there being a requirement of the person receiving the same, without applying the above test, it would certainly be a deposit. This is the only distinction. (Head note)"
11. The Hon'ble Supreme Court in the case of Ram Janki Devi v. Jugi Lal Kamlapat AIR 1971 SC 2551 held as under:
"12. The case of a deposit is something more than a mere loan of money. It will depend on the facts of each case whether the transaction is clothed with the character of a deposit of money. The surrounding circumstances, the relationship and character of the transaction and the manner in which parties treated the transaction will throw light on the true form of the transaction."
12. Lastly, we may refer to the judgment of apex Court in the case of Ram Ratan Gupta v. Director of Enforcement, FERA AIR 1966 SC 495. In that case, the Hon'ble Supreme Court had to consider the meaning to the expression 'to lend' as appearing in Section 4 of FERA, 1947. In that connection the Court discussed the meaning of the above expression and also discussed the distinction between 'loan' and 'deposit'. Their Lordships held as under:
"The expression 'to lend' in the ordinary use means to deliver to another a thing or on condition that the thing lent shall be returned with or without compensation for use made of it by the person to whom it is lent. The subject-matter of lending also be money. Though a loan contract created a debt, there may be a debt and without contracting a loan, in other words, the concept of debt is more comprehensive than that of loan.
It is settled law that the relationship between the banker and a customer qua debtor and creditor. Though, ordinarily a deposit of an amount in the current account of a bank creates a debt it does not necessarily involve a contract of loan. The question whether a deposit amount to a loan depends upon the terms of the contract under which the deposit is made. AIR 1962 SC 1764. Ref. to.
When a person deposits foreign currency in the current account of a bank in order to draw it whenever necessary for the purpose for which it was given, it cannot be said that he enters into a contract of loan with the bank within the meaning of Section 4(1) of the Act. He only deposits the money for the said purpose, such deposit is not a loan, the person cannot be held to have contravened Section 4(1) of the Act. (Head note)"
The above observations clearly show that deposits with the bank do not amount to loan.
13. In view of the above discussion, we are of the considered view that although the terms 'loans' and 'deposits' are not mutually exclusive yet they are not the Same thing. The most distinguishing feature which is relevant for resolving the controversy before us is that in case of loan, the needy person approaches the lender for seeking loan at the terms of the lender while in the case of deposit, it is the depositor, who goes to the depositee for investing his money primarily with the intention to earn interest, That is why the Hon'ble Supreme Court held in the case of Ram Ratan Gupta (supra) that deposit even in current account with the bank did not amount to loan. In view of such distinction, we are of the view that the interest on deposits would not fall within the ambit of the expression 'chargeable interest' appearing in Section 5 of the Act.
14. Considering the above legal position, it is held that interest on special deposits with Reserve Bank of India (RBI) is not taxable under the Act. RBI is the principal bank of India and, therefore, the question of lending any money to such bank simply does not arise. It is only the RBI which lends money to banks and other institutions to meet their requirements and not the wee versa. Such deposit was made under a special scheme approved under the provisions of Section 27B of Insurance Act. Hence, such interest would be excluded from the chargeable interest.
15. Similarly, it is further held that interest on fixed deposits, certificate deposits as well as interest on deposits with IDBI are not chargeable to tax under the Act since such deposits cannot be considered as loans inasmuch as the money is given at the instance of the assessee for the purpose of investing the same with the banks in consonance with the provisions of Section 27B of the Insurance Act. The deposit with IDBI was made at the instance of assessee to meet the requirement of Section 32AB. Consequently, such interest shall also be excluded from the chargeable interest.
16. As far as interest on loan given to DDA and UTI is concerned, it is held that the same has been rightly included by the lower authorities in the chargeable interest.
17. As far as other items are concerned, we set aside the orders of first appellate authority and restore the matter to the file of AO, who shall first determine the nature of the transactions and then decide whether such interest would be taxable or not.
18. In the result, appeals of the assessee are partly allowed.