2015 (10) TMI 819 - HC - Income Tax

Interest on investments in corporate bonds - whether fell within the scope of the definition of interest in Section 2(7) of the Interest Tax Act 1974 ? - Held that - If the case on hand had arisen solely out of the Income Tax Act 1961 we would not look into the definition of the expression interest under the Interest Tax Act 1974. The case on hand has arisen out of the provisions of the Interest Tax Act 1974. Apart from defining the expression interest in Sub-Section (7) of Section 2 the Interest Tax Act also contains another indication under Sub-Section (10) of Section 2. Under this Sub-Section the Interest Tax Act 1974 makes it clear that only those words and expressions used in that Act but not defined therein would have the same meaning assigned to them in the Income Tax Act 1961. Therefore it is only in cases where an expression is not defined in the Interest Tax Act 1974 for the purpose of application of the said Act that we have to borrow the definition of the same expression in the Income Tax Act 1961. This case is not of the said type. Therefore we are of the view that the decision of the Supreme Court in Sahara India Savings and Investment Corporation Limited 2009 (11) TMI 25 - SUPREME COURT OF INDIA wherein held that for the purpose of Interest Tax Act 1974 interest on loans and advances will not cover under Section 2(7) interest on bonds and debentures bought by an assessee as and by way of investment. The Court clarified that interest on investments is not taxable as interest under Section 2(7) of the Act is squarely applicable to the facts of this case. - Decided in favour of the assessee

Summary

Issues involved:
Interpretation of the definition of 'interest' under the Interest Tax Act, 1974 in relation to income earned from investments in corporate bonds.

Analysis:
The High Court of Madras heard an appeal under Section 260A of the Income Tax Act, 1961 regarding the taxability of interest earned on investments in corporate bonds. The appellant, engaged in providing long-term finance, invested surplus funds in corporate bonds and earned interest. The dispute arose when the Assessing Officer deemed this interest as exigible to interest tax under the Interest Tax Act, 1974. The Commissioner of Income Tax (Appeals) initially allowed the appeal, but the Income Tax Appellate Tribunal reversed this decision, leading to the current appeal.

To understand the dispute, the Court referred to the definition of 'interest' under Section 2(7) of the Interest Tax Act, 1974, which includes interest on loans and advances made in India but excludes certain types of interest. The Court cited precedents to clarify the scope of 'interest,' emphasizing that interest on investments like debentures does not fall under the definition of 'interest on loans and advances.' Notably, the Supreme Court's decision in Commissioner of Income Tax Vs. Sahara India Savings and Investment Corporation Limited established that interest on bonds and debentures bought as investments is not taxable as interest under the Act.

The Court rejected the Department's argument that the Income Tax Act, 1961's exhaustive definition of 'interest' should apply, emphasizing that the case pertains to the Interest Tax Act, 1974. The Court clarified that expressions defined in the Interest Tax Act should be interpreted within its provisions, with reference to the Income Tax Act only if necessary. Given the precedent set by the Supreme Court, the Court ruled in favor of the assessee, concluding that the interest earned on corporate bonds was not subject to interest tax under the Interest Tax Act, 1974.

In light of the above analysis, the Court allowed the tax case appeal in favor of the assessee, emphasizing the precedence set by the Supreme Court and the specific definitions within the Interest Tax Act, 1974 that govern the taxability of interest earned on investments in corporate bonds.