Commissioner of Income Tax vs Nedungadi Bank Ltd., Dhanalakshmi Bank Ltd. and South Indian Bank Ltd.

C.N. Ramachandran Nair, J.—These appeals filed by the Revenue u/s 260A of the Income Tax Act, 1961, are against the common order of the Tribunal holding that interest-tax is not payable under the Interest-tax Act, 1974, as amended by the Finance (No. 2) Act of 1991, on interest on Government securities received by the respondent-banks. We have heard senior counsel appearing for the Income Tax Department for the appellant and counsel appearing for the respondent-assessee in all these cases.

The short question arising for consideration is whether interest on securities is chargeable to tax under the Interest-tax Act, 1974. In fact, until the amendment of the Interest-tax Act in the year 1991, there was specific exclusion of interest on securities from the scope of interest as defined u/s 2(7) of the Act. The issue cropped up and survives only for the assessment years 1992-93 to 1995-96 because from the financial year 1995-96 onwards Government of India issued order on September 11, 1995, granting exemption from interest-tax on interest on securities. The question, therefore, is whether the amendment to the Interest-tax Act in 1991 authorises levy of tax on interest on securities after the amendment and exemption is available only because of the order issued by Government u/s 29 of the Act. In order to decide the issue, we have to refer to the definition clause prior to and after the amendment. Section 2(7) as it stood originally and as amended is extracted hereunder:

As per the Interest-tax Act, 1974

2.(7) ''interest'' means interest on loans ad 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 it India, but does not include;

(i) any amount chargeable to Income Tax under the Income Tax Act under the head ''Interest on securities''.

As per the Interest-tax Act, 1991

2.(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 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.

Counsel for the Revenue contended that after the exclusion clause is removed through the amendment in 1991, interest on securities falls within the definition of "interest" u/s 2(7) as it is also interest. However, counsel for the assessees on the other hand contended that what is chargeable under the Interest-tax Act is not all interest received by "credit institutions", but interest on "loans and advances" and other charges treated as interest are covered by clauses (a) and (b) of the definition clause. Counsel for the assessees has relied on the decisions of this Court in Commissioner of Income Tax Vs. Nedungadi Bank Ltd., in Commissioner of Income Tax Vs. Federal Bank Ltd., that of the Madras High Court in Commissioner of Income Tax Vs. Karur Vysya Bank Ltd., , that of the Bombay High Court in Discount and Finance House of India Ltd. Vs. S.K. Bhardwaj, Commissioner of Income Tax and Others, and the decision of the same High Court in Commissioner of Income Tax Vs. United Western Bank Ltd., . We find that the decision of the Bombay High Court is confirmed by the Supreme Court in Commissioner of Income Tax Vs. Corporation Bank, . Since the issue is basically covered by the decision of the various High Courts confirmed by the Supreme Court, in the normal course we should follow the decision of the Supreme Court and dismiss the Department''s appeals. However, senior counsel for the Revenue has drawn our attention on the distinction drawn by the Bombay High Court on Government securities under the head "Permanent" and "Current". According to counsel, the decision in favour of the assessees apply only to Government securities of a permanent nature and not to current securities. It is to be noted that right from the assessing authority to the Appellate Tribunal no one has considered the nature of Government securities which yielded the income to the assessee. Counsel for the assessees contended that interest on Government securities under no circumstances could be brought to tax as interest under the Interest-tax Act. According to him, there is no difference between securities of a permanent nature and current securities and it is contended that all securities are permanent. We do not think the distinction drawn by standing counsel for the Revenue between securities of a permanent nature and current securities has any relevance because what attracts tax under the Act is interest received on loans and advances. So long as Government security is concerned, whatever be its nature, it does not answer the description of "loans and advances" covered by Section 2(7) of the Act. There is no justification to levy interest-tax on the interest received on investment in the nature of Government securities. Standing counsel for the Revenue heavily relied on the amendment of 1993 whereunder specific exclusion from "interest" originally provided for "interest on securities" u/s 2(7)(b)(i) is deleted. According to him, the purpose of the amendment is to bring to tax interest income from interest on securities. We are unable to accept this contention because the deletion of this clause happened to be made consequent upon the amendment to the Income Tax Act whereunder the income under the head "Interest on securities" covered by Section 14 of the Act was deleted with effect from April 1, 1989. In the course of amendment, the statute was made consistent with the provisions of the Income Tax Act, 1961. Further, we agree with the view expressed by the Bombay High Court in the decisions referred above reported in Discount and Finance House of India Ltd. Vs. S.K. Bhardwaj, Commissioner of Income Tax and Others, and Commissioner of Income Tax Vs. United Western Bank Ltd., and hold that the deletion of the exclusion clause through the amendment of 1991 does not introduce any tax on income from Government securities which is not a "loan" or "advance" covered by Section 2(7) of the Act, which alone attracts tax under the Act. It is to be noted that if the Legislature desired to introduce tax on interest income from investment like securities, they could have specifically provided so, particularly when specific exclusion clause originally contained in the definition of "interest" for "interest on securities" was deleted from the statute. We are, therefore, of the view that interest on securities of the Government, whatever be the nature of security, cannot be treated as a loan or advance and consequently interest from security cannot be assessed under the Interest-tax Act.

We, therefore, dismiss all the appeals filed by the Revenue.