Commissioner of Income Tax vs Tamilnadu Mercantile Bank Ltd.

P.D. Dinakaran, J.—The above tax case appeal is directed against the order of the Income Tax Appellate Tribunal in

ITA.No.70/Mds/2001, dated 9.05.2005.

The Revenue is the appellant. The assessment year involved is 1995-96. The case of the appellant is that the assessee/respondent herein is a

scheduled Bank engaged in the business of banking. In the interest tax assessment, the assessing officer made an addition on account of interest on

Government Securities, interest on tax free investment, interest on bonds, interest on Treasury Bills and interest received on investment deposit

scheme-IDBI, which the assessee had not included and subjected the same to interest tax. On appeal at the instance of the assessee, the

Commissioner of Income Tax (Appeals) directed the assessing officer to exclude the interest received from the above five securities from

computation of chargeable interest, which was confirmed by the Appellate Tribunal, on appeal by the Revenue.

Aggrieved by the same, the Revenue has preferred this appeal raising the following substantial question of law:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that interest on Government Securities, Interest on Tax free

investment, interest on bonds, interest on treasury bills and interest received on investment deposit scheme -IDBI would not be subject to tax

under the Income Tax Act?

It is fairly conceded by the learned counsel appearing for the Revenue that the issue raised in the above question is covered against the Revenue

by the decision of Bombay High Court in Discount and Finance House of India Ltd. Vs. S.K. Bhardwaj, Commissioner of Income Tax and

Others, wherein it is held as under:-

The object of the Interest-tax Act was to discourage borrowings by increasing the cost of borrowings. This was in 1974. The other object was to

increase the revenue. During the period September 23, 1974, to March 31, 1992, interest rates in India were administered centrally. However,

after April 1, 1992, interest rates have been freed and they are fixed by market forces of demand and supply. After 1992, one of the biggest

market borrowers is the Government. Therefore, the Act has been operating intermittently depending upon the economy of the country. Section 2

of the Interest-tax Act, 1974, is a definition section. It starts with the expression ""in this Act, unless the context otherwise requires"". Section 2(7)

forms part of the definition section. It defines the word ""interest"" to mean interest on loans and advances including commitment charges, discount

on promissory notes but excluding discount on treasury bills. Section 2(7), read in the context of Sections 26C, which permits the lender to modify

the existing agreement so as to pass on the burden of interest-tax to the borrower, shows that ""interest"" in Sections 2(7) does not include interest

on dated Government securities.

Loans and advances, as a concept, are different and distinct from investments in the commercial sense and also in the accounting sense as also

under Sections 370 and 372 of the Companies Act as also u/s 29 read with Schedule III to the Banking Regulation Act, 1949, as also u/s 13(1)

(d) and Section 11(5) of the Income Tax Act, 1961. Similarly, the definition of the word ""interest"" in Section 2(28A) of the Income Tax Act vis-a-

vis Sections 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. If so read, interest received from the Reserve Bank of India on dated Government securities will not

fall within the meaning of the expression ""interest on loans and advances"" u/s 2(7). The deletion of the exclusionary clause by the Finance (No. 2)

Act of 1991 would have no effect on Section 2(7) as the exclusionary clause was only clarificatory in nature.

... (i) that interest-tax was not leviable on the interest received from the RBI on Dated Government Securities and, consequently, the issue raised

concerned lack of authority/jurisdiction on the part of the Assessing Officer under the Interest-tax Act to levy tax on such interest. Therefore, such

an issue had to be decided by the Commissioner of Income Tax under his revisional jurisdiction.

(ii) That the Revenue 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 u/s 26C. [It was made clear that the judgment applied only to the interest

paid by the RBI to the petitioner on its holding the Dated Government Securities in SGL account with the RBI].

In view of the above settled proposition, we hold that the Tribunal was right in holding that interest on Government Securities, Interest on Tax

free investment, interest on bonds, interest on treasury bills and interest received on investment deposit scheme -IDBI would not be subject to tax

under the Income Tax Act. Accordingly, the question of law is answered in the affirmative, against the Revenue and in favour of the assessee. The

appeal is dismissed. No costs.