High Court Of Bombay
Discount & Finance House Of India Ltd. vs. S.K. Bhardwaj, CIT & Ors.
Sections INT 2(7), INT 4, INT 5, INT 20, INT 26C
Asst. Year 1994-95
S.H. Kapadia & J.P. Devadhar, JJ.
Writ Petn. No. 1391 of 2002
4th December, 2002
Counsel Appeared
P.J. Pardiwala with Atual Jasani, for the Petitioner. : R.V. Desai with P.S. Jetley & V. H. Kantharia, for the Respondent
JUDGMENT
S.H. Kapadia, J. :
The short question of law which arises for determination is : Whether interest on debentures, bonds and securities is taxable under s. 5 of the Interest-tax Act, 1974 ?
Facts
2. The petitioner is a company incorporated under the Companies Act, 1956. It was promoted by the RBI, ICICI, UTI, SBI, IDBI, etc. It is an investment company as defined under s. 2(5B)(ii) of the Interest-tax Act, 1974, as it then stood. The petitioner is a dealer in money market instruments such as call/notice/term money, treasury bills, commercial paper, certificate of deposit and Government Dated Securities. The Government Dated Securities market has two segments, viz., primary market and secondary market. The primary market consists of issuers and subscribers. The issuers are the Central and State Governments. The secondary market includes banks, financial institutions, insurance companies, provident funds, trusts, individuals, primary dealers, etc. The petitioner is a primary dealer in Dated Government Securities. The petitioner subscribes to, buys, stocks and trades in Dated Government Securities regularly. At the end of the year, the petitioner shows the Dated Government Securities in its accounts under the head “Current assets” as stock-in-hand. The profits on sale of Dated Government Securities as well as the interest earned on Dated Government Securities are shown as business income and are assessed under the IT Act, 1961.
On 1st Aug., 1974, the Interest-tax Act came into force for the first time. It remained in force up to 28th Feb., 1978. It was revived from 1st July, 1980. It continued up to 31st March, 1985. Thereafter, from 1st April, 1985, upto 1st Oct.,1991, it was withdrawn. However, w.e.f. 1st Oct.,1991, the Act of 1974 was once again revived and it continued upto 31st March, 2000.
As stated above, the petitioner is an investment company. As an investment company, it came within the ambit of the expression “financial company” as defined under s. 2(5B)(ii) and as a financial company it came with the ambit of credit institution as defined under s. 2(5A)(iv). As a credit institution, the petitioner filed its return of chargeable interest for the year ending 31st March, 1994, relevant to the asst. yr. 1994-95. The return was filed on 5th Dec., 1994, returning a total chargeable interest at Rs. 24.83 lakhs (approximately). The said interest included interest of Rs. 15.69 lakhs received from the RBI during the financial year 1993-94 on Dated Government Securities directly subscribed by the petitioner at the time of its initial issue by the Government. The assessment was completed under s. 8(2) of the Act vide order dt. 7th March,1997, accepting the return of chargeable interest, after scrutiny. However, the petitioner came across a circular issued by the RBI under which it was clarified that interest earned on Government securities does not amount to interest within the meaning of s. 2(7) of the Interest-tax Act. In view of the said circular (Exhibit I to the petition), the petitioner filed a revision petition on 22nd July, 1997, under s. 20 of the Interest-tax Act, 1974, contending that the Dated Government Securities held by the petitioner did not represent monies lent to the Government and, there-fore, interest earned on such Dated Government Securities was not in the nature of interest on loans and thus such interest was not chargeable to tax under s. 4 of the Interest-tax Act, 1974. By order dt. 28th Feb., 2002, the revisional authority rejected the revision on the ground that the new claim cannot be considered for the first time under s. 20. It was also rejected on the merits. The revisional authority took the view that the word “interest” is defined under s. 2(7) to mean “interest on loans and advances”. That the expression “loans and advances” included interest on Dated Government Securities. Accordingly, the revision petition filed by the assessee came to be rejected. Being aggrieved, the present petition is filed.
Arguments
3. Mr. P.J. Pardiwala, learned counsel appearing on behalf of the petitioner, contended that the Interest-tax Act was introduced in 1974 for the first time w.e.f. asst. yr. 1975-76. That, thereafter the said Act was dropped and revived from time to time as stated above. He contended that this was because the Act was enacted for two-fold purposes, viz., as an anti-inflationary measure and also to augment Government revenues. He relied upon the judgment of the Division Bench of this Court [to which one of us (Kapadia J.) was a party] in the case of Unit Trust of India vs. P. K. Unny & Ors. (2001) 168 CTR (Bom) 99 : (2001) 249 ITR 612 (Bom) in support of his contention that the Act was introduced as an anti-inflationary measure and to augment the revenues. He contended that the petitioner was a trader. That the petitioner has subscribed to Dated Government Securities as a trader. That the petitioner got the securities and they have held those securities as its stock-in-trade. He contended that there was a difference between lending and investing. That the securities were acquired as income-earning assets and not for lending money to the Government. That, when the petitioner subscribes to the Dated Government Securities, it is not giving loan to the RBI. That the petitioner acquires the asset by subscribing to the loans of Central and State Governments and thereafter deals with those securities. He contended that the Interest-tax Act applied only to loans and advances and not to investments. He submitted that the Act itself indicates the difference between lending and investment. In this connection, he invited our attention to s. 2(5B)(ii), which includes investment company into the definition of “financial company”. He contended that under s. 2(5B), a financial company covered an investment company as also a loan company [see s. 2(5B)(iv)]. Accordingly, he submitted that there was a difference between investing and giving loans. He further contended that the word “interest” is defined under s. 2(7) of the Act of 1974, to mean “interest on loans and advances”. He contended that in view of the express provision of s. 2(7) and in view of the difference between loan and investment, the words “interest on loans and advances” cannot cover Dated Government Securities. He once again reiterated that by subscribing to Government loans, the petitioner is not giving loans to the Government. It forms part of investment on the part of the petitioner. He, therefore, contended that Dated Government Securities do not fall within s. 2(7) of the Act. He contended that when a credit institution subscribes to Dated Government Securities, it does not intend to finance the borrower. It intends to acquire an asset in which it can trade. The petitioner cannot trade in loans and advances. He contended that the petitioner has an investment portfolio and, therefore, it can deal in securities. He pointed out that the bank has a loan portfolio and, therefore, it cannot trade in loan portfolio, whereas if an assessee has an investment portfolio, it can deal in securities. He invited our attention to the balance-sheet of the company and submitted that the petitioner was only a trader and not an investor. He pointed out from the balance-sheet of the petitioner that there is no investment on the part of the petitioner. That the total turnover of the petitioner in Dated Government Securities at the end of the financial year 31st March, 1994, stood at Rs. 14,388 crores. That the securities were held as stock-in-trade under the caption “current assets”. In this connection, he invited our attention to Schedule V of the balance-sheet, which refers to Dated Government Securities on hand (at cost) amounting to Rs. 487.63 crores. He also invited our attention to the P&L a/c for the year ending 31st March, 1994, which indicates receipt of interest on Dated Government Securities (net) at Rs. 3,226 lakhs. He invited our attention to the various provisions of the Banking Regulation Act, 1949, and the Companies Act to draw up the distinction between loans and investments. He contended that whether the assessee holds the securities as investments or stock-in-trade is of no consequence because under s. 2(7), the word “interest” is defined to mean “interest on loans and advances” and interest on loans and advances cannot mean interest on securities. He contended that under s. 6 of the Banking
Regulation Act also, the business in which banking companies may engage is laid down. It refers to lending as well as buying and dealing in debentures. He contended that in this case, the Court will have to consider the scheme of the Act as also the object of the Act. He submitted that the object of the Act was to discourage borrowings by various institutions and in order to discourage borrowings, the cost of borrowings is increased by charging interest- tax on the lenders who were entitled to recover such charges from the borrowers. In support of his contention, he relied upon s. 26C of the Interest-tax Act, which, inter alia, lays down that notwithstanding anything contained in any agreement under which loan is sanctioned, 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 the credit institution is liable to pay the interest-tax under the said Act, 1974. He, therefore, submitted that s. 26C supported his argument that the Interest- tax Act was introduced as an anti-inflationary measure to discourage borrowings by making the borrowings costlier. He further submitted that even s. 26C shows that the said Act of 1974 applies only to interest on loans and advances because only loan agreements could have been varied so as to increase the rate of interest stipulated therein to the extent to which the credit institution is liable to pay the interest-tax under the Act. That, s. 26C could never apply to an investment because in the case of investment such variation could never be incorporated. He, therefore, contended that the Act only applied to interest on loans and advances and not to interest on securities. He contended that s. 26C shows that the said Act of 1974 was applicable only to cases where credit institutions could vary the terms of interest. That such variation could not apply to investments.
Mr. Pardiwala further contended that in this petition, the petitioner is seeking to raise a jurisdictional issue. That in this petition, the petitioner contends that levy of interest-tax on securities was without authority of law and, therefore, s. 20 of the Act was attracted. In the circumstances, he contended that the revisional authority erred in rejecting the revision petition, inter alia, on the ground that the new claim cannot be considered for the first time in the revision petition, particularly, when the assessee had returned the chargeable interest by filing its return under the Act which return came to be accepted by the AO. The revisional authority held that the interest earned on securities by the assessee was offered for the purposes of interest-tax and having offered it the assessee cannot be permitted to raise a new claim for the first time under s. 20. Mr. Pardiwala contended that the view of the revisional authority was erroneous. He contended that the point raised by the petitioner goes to the root of the matter and, consequently, the revisional authority should have entertained the petition under s. 20 of the Act. He further contended that the revisional authority erred in coming to the conclusion that s. 2(7) covered interest on securities.
4. Mr. R.V. Desai, learned senior counsel for the Department, submitted that prior to 1st Oct., 1991, s. 2(7), which defines the word “interest” to mean “interest on loans and advances” included commitment charges and discounts on promissory notes/bills of exchange, but the legislature expressly excluded interest on securities. He contended that by the Finance (No. 2) Act of 1991, the above express exclusion was omitted and, therefore, after 1st Oct., 1991, the legislative intent was clear, viz., to tax interest on securities. He contended that because the legislature wanted to include interest on securities within the meaning of the phrase “interest on loans and advances” in s. 2(7) of the Act, the legislature dropped the express exclusion from s. 2(7). Mr. R.V. Desai further submitted that when the petitioner subscribed to Dated Government Securities, the petitioner extended loans to the issuer. He, therefore, submitted that there was no difference between investment and loans. Mr. Desai submitted that subscribing to the loans was also a form of advancing loans. He, therefore, contended that there was a deliberate dropping of the exclusionary clause from s. 2(7) because the legislature wanted to tax interest on securities as falling within the expression “interest on loans and advances” under s. 2(7) of the Act. Findings 5. At the outset, we may state that we are confining our case only to the facts of this case. The assessee has argued the matter on a very wide issue which does not arise in this case. In this case, the only question which arises for determination is : whether gross interest received by the RBI during the accounting year 1993-94 on Dated Securities directly subscribed by the company at the time of initial issue by the Government amounting to Rs. 15,69,41,050 came within the meaning of the word “interest” under s. 2(7) of the Interest-tax Act, 1974. The petitioner, in its accounts at the year end, shows Dated Government Securities under the head “Current Assets— Stock-in-trade”. The profits on sale of Dated Government Securities as well as interest earned on Dated Government Securities are shown as business income and are assessed, as such, under the IT Act, 1961. Before the revisional authority, the main argument advanced on behalf of the petitioner was that the aforestated amount of Rs. 15,69,41,050 was not taxable under s. 2(7) of the Interest-tax Act as the holder of the security, namely, the petitioner, was not in a position to pass on the intended interest-tax to the issuer of the Dated Government Securities, namely, the Central Government. This argument was rejected. Therefore, the petitioner has filed this petition challenging the impugned order of the revisional authority. We are, therefore, required to examine the Act in the context of this argument. The Act came into force w.e.f. 23rd Sept., 1974. It continued to operate upto 31st March, 1978. It was dropped from 1st April, 1978, upto 30th June, 1980. It was revived from 1st July, 1980, upto 31st March, 1985. It was once again dropped from 1st April, 1985, upto 30th Sept., 1991. It was reintroduced w.e.f. 1st Oct., 1991, vide Finance (No. 2) Act, 1991, and it continued to operate upto 31st March, 2000. Thereafter, it has been dropped again. One has to ask a question as to why the Act has been operating intermittently. The object of the 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 23rd Sept., 1974, upto 31st March, 1992, interest rates in India were administered centrally. However, after 1st April, 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. This has been discussed in the judgment of the Division Bench of this Court to which one of us (S. H. Kapadia, J.) is a party in the case of Unit Trust of India vs. P. K. Unny (supra). Therefore, 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 vs. P.K. Unny (supra), it has been held that interest-tax is a special tax. It operates as an indirect levy on the borrower. This is indicated by s. 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 s. 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 s. 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 s. 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 s. 29 r/w Schedule III of the Banking Regulation Act, 1949, as also under s. 13(1)(d) and s. 11(5) of the IT Act. Similarly, the definition of the word “interest” in s. 2(28A) of the IT Act vis-a-vis s. 2(7) brings out the difference between lending on the one hand and investment on the other hand. Therefore, one has to read s. 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 s. 2(7) of the Interest-tax Act. It has been argued on behalf of the Department that prior to 1st Oct., 1991, s. 2(7) of the Interest-tax Act had an exclusionary clause which excluded interest on securities. That, by the Finance (No. 2) Act of 1991 which came into force from 1st Oct, 1991, that exclusionary clause, which excluded interest on Government securities, was deleted and therefore, the legislature intended to charge and levy interest-tax on interest received from the RBI on Dated Government Securities. We do not find any merit in this argument. In the case of CIT vs. Madurai Mills Co. Ltd. 1973 CTR (SC) 223 : (1973) 89 ITR 45 (SC), a similar argument was advanced by the Department.
In that matter, the question which arose before the Supreme Court was whether capital gains stood attracted on distribution of assets of companies in liquidation. It was held by the Supreme Court that distribution of the assets of the companies in liquidation did not amount to transfer under s. 12B(1) of the Indian IT Act, 1922. One of the arguments advanced on behalf of the Department was that prior to the Finance (No. 3) Act of 1956, there was a proviso in s. 12B(1) of the Indian IT Act, 1922, which excluded such distribution of assets from the word “transfer” in section 12B(1) of the Act. It was argued that after the Finance (No. 3) Act of 1956 that proviso was deleted and, therefore, Parliament intended to levy tax on distribution of assets of companies in liquidation. This argument was rejected by the Supreme Court. The Supreme Court held that the proviso to s. 12B(1) was introduced by Parliament by way of abundant caution. It was clarificatory in nature. That, the main s. 12B(1) itself contemplated exclusion of capital gains from distribution of assets of companies in liquidation and, therefore, deletion of the proviso had no effect on the main s. 12B(1). This judgment of the Supreme Court in Madurai Mills Co. Ltd.‘s case (supra), squarely applies to the facts of the present case. In the present case, if one construes s. 2(7) in the context of the object of the Act and the scheme of the Act, it is clear that the main s. 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 s. 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, s. 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, s. 26C demolishes the argument of the Department that the word “interest” means interest on Dated Government Securities. One has to read s. 2(7) with s. 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 s. 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 RBI under s. 26C of the Act.
6. One of the incidental points, which remains for consideration in this case is: Whether the CIT (revisional authority under s. 20 of the Interest-tax Act) was right in rejecting the revision application of the petitioner on the ground of non-maintainability ? Under the impugned order, it has been held by the revisional authority that under s. 20 of the Act, the revisional authority cannot allow the assessee to raise a claim for the first time, particularly when the assessee has offered the said amount of Rs. 15,69,41,050 to tax. This finding of the revisional authority, in our view, is erroneous. In this case, the assessee has raised a question, which goes to the root of the matter. The point at issue before the revisional authority was not concerning the legality of the order of the AO, but it was concerning lack of authority/jurisdiction. In our view, interest-tax was not leviable on the interest received from the RBI on Dated Government Securities and, consequently, the issue raised concerns lack of authority/jurisdiction on the part of the AO under the Interest-tax Act to levy tax on such interest. Therefore, such an issue was entertainable under s. 20 of the Interest-tax Act.
7. Before concluding, we want to clarify one point. The petitioner subscribes to Dated Government Securities of the RBI. It receives from the RBI half-yearly interest on the coupon dates every year. The interest is paid twice in a year on the holding of the petitioner in SGL account with the RBI. Our judgment applies only to the interest paid by the RBI to the petitioner on its holding the Dated Government Securities in the SGL account with the RBI. This clarification is required to be made because the petitioner also deals with Dated Government Securities after subscribing to the same. In other words, after subscribing, the petitioner also sells Dated Government Securities under which activity they earn interest as also profits which are shown as business income under the IT Act. Our judgment, therefore, does not touch the interest received by the petitioner on sale of Dated Government Securities after they are subscribed to. It may be noted that, in this case, we are only concerned with interest received from the RBI by the petitioner on the Dated Government Securities held by it on the coupon date. Our judgment is not concerned with the interest earned on Dated Government Securities which are sold by the petitioner to other institutions thereafter. Therefore, we have confined our judgment only to the amount of Rs. 15,69,41,050 which the petitioner has received from the RBI as gross interest on Dated Government Securities directly subscribed by the petitioner.
8. Subject to the above, the petition is allowed in terms of prayer cl. (b). No order as to costs.
[Citation : 259 ITR 295]
