1996 (8) TMI 42 - HC - Income Tax

Summary

Issues Involved:
1. Whether interest on debentures can be treated as interest on loans and advances under the Interest-tax Act, 1974.
2. Whether debentures issued by a co-operative bank can be regarded as issued by a company established under a State or Provincial Act, and thus, the interest is assessable under "interest on securities" and outside the purview of the Interest-tax Act, 1974.

Summary:

Issue 1: Interest on Debentures as Interest on Loans and Advances
The Tribunal found that interest on debentures issued by the co-operative land mortgage bank cannot be considered as interest on loans and advances. Debentures are classified as investments in standard accountancy and in the assessee's balance-sheet as per section 29 of the Banking Regulation Act. The Tribunal held that interest on debentures is interest on investment, not on loans and advances, thus outside the purview of the Interest-tax Act. The Tribunal also noted that even if considered as loans and advances, such interest would be exempt as "interest on securities" under the Income-tax Act, specifically excluded from the definition of interest in the Interest-tax Act.

Issue 2: Debentures Issued by Co-operative Bank as Securities
The Tribunal concluded that debentures issued by co-operative societies, including a co-operative land mortgage bank, come under section 193 for tax deduction purposes and can be treated as issued by a corporation established under a State Act within the meaning of section 18(1)(ii) of the Income-tax Act. The Tribunal reasoned that since co-operative societies are corporations with common seal and perpetual succession, debentures issued by them should be excluded from the Interest-tax Act, similar to debentures issued by companies.

The court, however, disagreed with the Tribunal's view that a co-operative society is a corporation established by a State Act. Referring to the Supreme Court decision in S. S. Dhanoa v. Municipal Corporation, Delhi, it was held that a co-operative society is not a statutory body but a body created by individuals under a statute. Therefore, the interest on debentures issued by the co-operative land mortgage bank does not fall under "interest on securities" as defined in section 18 of the Income-tax Act and is not excluded from the Interest-tax Act.

Conclusion:
1. The court affirmed the Tribunal's decision that interest on debentures is interest on investment and not on loans and advances, thus outside the purview of the Interest-tax Act.
2. The court rejected the Tribunal's conclusion that debentures issued by a co-operative land mortgage bank are equivalent to those issued by a corporation established by a State Act, thereby not exempting such interest from the Interest-tax Act.

No costs were awarded. Counsel's fee was fixed at Rs. 2,000.