TMI Blog2001 (3) TMI 1021X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee in all these appeals is aggrieved against inclusion of interest on debentures, bonds and government securities in the total amount of interest on loans and advances and subjecting it to interest tax under the Interest-tax Act, 1974 (the Act). 3. Assessee, that is, Life Insurance Corporation of India (LIC for short) is a body corporate established under the Life Insurance Corporation Act, 1956 (LIC Act for short), primarily to carry on life insurance business in or outside India. For the years under consideration, assessee filed its returns of chargeable interest showing chargeable interest as follows : Assessment year Chargeable Interest Returned Rs. 1992-93 481,14,37,010 1993-94 933,28,14,120 1994-95 1135,32,44,426 1995-96 1363,22,22,210 1996-97 1242,67,40,190 It was claimed by the assessee that it had not taken into account interest on Government of India Securities (Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent version of the Act, Assessing Officer was of the view that actual meaning of the word interest as defined in section 2(7) of the Act will have to be given effect. Reference was made to CBDT s instruction No. 1923 dated 14-3-1995. In view of the foregoing discussion, Assessing Officer included interest on debentures, bonds and Government securities in total interest exigible to interest tax. The order for assessment year 1992-93 was followed in the rest of the assessment years under consideration. The details of additions made in each year are as follows : Assessment year Interest on debentures, bonds, securities etc. Rs. Total chargeable interest - Rs. 1992-93 874,91,00,000 1356,05,37,010 1993-94 2171,48,00,000 3104,76,14,120 1994-95 2754,09,00,000 3889,41,44,426 1995-96 3675,14,00,000 5038,36,22,210 1996-97 4773,91,00,000 60,16,58,40,190 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vary. These terms are rather vague and indefinite. The meaning of the relevant statutory provisions seems to be much more fixed and definite. Whatever commercial practice or trading principles may imply or import, they could not alter the meaning of statutory provisions or travel beyond it; (iii)the accounts to be maintained in a particular manner is no criteria or evidence for determining when the liability arises. Liability to tax would be determined with reference to the interpretation of the statute which created it and not by referring to another statute; (iv)substance of the matter cannot be altered by a mere method of accounting. Based on the above discussion, CIT(A) observed that showing debentures etc. under the head investment in view of the provisions of the Compa- nies Act or Banking Regulation Act cannot be relevant for the purpose of determining the scope of expression loans and advances under section 2(7) of the Interest-tax Act. 11. In para 5, CIT(A) refers to certain decisions of the Hon ble Courts which have considered the expression loans and advances . Reference is made to the decision of the Bombay High Court in the case of CIT v. P.K. Badiani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement on account of agreement between the holder and the borrower company. This arrangement, it is observed, does not violate the elements of loan because unsecured loan can also be transferred under section 130 of the Transfer of Property Act, 1882. 14. Para 8 of the CIT(A) s order speaks about government securities. It is held that loans taken by government from public are declared as securities and are popularly known as securities. But their declaration as such do not change or damage the character of loans. Section 40(a)( i) of the Income-tax Act is referred wherein it is clarified that government securities are loans issued for public subscription. Thus, interest on government securities is held to be includible in total interest under section 2(7) of the Act. 15. In para 9, CIT(A) states that government loans, bonds etc., are declared as securities for specific purposes so that a public charitable trust may acquire such securities either by purchase or by subscription. The declaration of securities in respect of loan does not in any way violate the fundamental and essential element of loans and advances. 16. In para 12, CIT(A) refers to the Rule of Ex Visceribus Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a restricted sense. 19. Lastly, CIT(A) deals with the argument of the assessee that interest only on those loans and advances is chargeable to tax which is elastic in the sense that interest rate could be jacked-up by the credit institutions. This argument was based on the speech of the Finance Minister while presenting the budget for 1991-92 wherein it was stated that credit institutions were entitled to reimburse themselves by making necessary adjustments in the interest rates charged from the borrower. According to the CIT(A), the speech of the Finance Minister refers only to term loans mentioned in section 26C of the Act. It is further observed that it is nowhere mentioned that only those loans and advances are subject matter of interest tax in which interest rate can be increased by the institutions. Finally, it is observed that section 28 of the Act clearly demonstrates that there are various categories of loans and advances and, therefore, the term loans and advances in section 2(7) should be considered from a legal and proper sense. 20. Based on the above discussion, broadly noted by us in paras 7 to 19 above, CIT(A) held that the Assessing Officer was justified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of interest on government securities and debentures. 22. Next, Mr. Pardiwalla referred to the definition of the term interest as defined in section 2(7) of the Act, which is as follows : Interest means interest on loans and advances made in India and includes: (a )commitment charges on unutilized portion of any credit sanctioned for being availed 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. The contention was that the definition uses the expression means and includes which indicates that the definition is exhaustive and hence interest on government securities and debentures will not form part of chargeable interest under the Act. The main thrust was to charge interest earned on loans and advances and not the interest earned on investments. To explain the purport of the expression means and includes , reliance was placed on the decision of the Supreme Court in the case of Mahalakshmi Oil Mills v. State of Andhra Pradesh AIR 1989 SC 335. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pn. v. Collector of Customs [1998] 111 STC 69 was relied upon and also the decision in CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45 was cited. 26. The Board issued a notification No. 9858/F. No. 160/2/94-ITA-I dated 11-9-1995 under section 28 of the Act exempting banks from the levy of interest tax in respect of their income from interest on securities with effect from financial year 1995-96. The submission of Mr. Pardiwalla was that this notification should be treated as clarificatory in nature, and moreover, section 26C of the Act bears testimony to the fact that credit institutions could reimburse themselves to the extent of interest tax by varying the terms of agreement. Reliance was also placed on the decision of the Bombay High Court in the case of CIT v. Aloo Investment Co. (P.) Ltd. [1980] 123 ITR 1322 . 27. Alternatively, it was contended by Mr. Pardiwalla that if at all interest tax has to be levied on interest on securities, debentures etc., only that portion should be taxed which has been earned on direct subscription and not on those securities which are purchased from the market. 28. Finally, it was submitted that where two views are possible, the one favou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for short). This provision, it was submitted, did not mean that the prescription could be only with regard to investment in securities but it also meant investment by way of making loans. Again, under section 28 insurer was under an obligation to furnish an annual statement showing assets held invested in accordance with section 27. Section 27, as mentioned earlier, did not make any distinction between investment in government securities and making of loans. Section 29(3) prohibited the insurer from granting any loan except as specified in section 27A. Again, it was submitted, section 27A provided for various modes of investments, which, inter alia, included making of loans as well as investment in securities. Section 6 of the LIC Act and Rule 10B(h) of the Insurance Rules, 1939 were also referred to. In short, by referring to all these provisions, Mr. Kapila tried to impress upon us that there was no distinction between investments made in government securities, bonds, debentures on one hand, and investment made by way of loans on the other. The segregation in balance sheet into loans and investment in securities was a matter of form and presentation and it did not give the true ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to scheduled banks. LIC was a later inclusion and, therefore, there appears to be a mis-match. The concepts which apply to banks, need not apply to LIC. Referring to the definition of the term interest as defined in section 2(7) of the Act, it was submitted that in the earlier version of the Act, amount chargeable to income-tax under the Income-tax Act under the head Interest on securities was specifically excluded from the purview of the Act. Dropping of this provision in the new version could not be said to be clarificatory, because, with the omission of the head Interest on securities and consequential omission of sections 18 to 21, section 2(28B) was inserted in the Income-tax Act defining the term interest on securities . Reference was made to Notification No. 9858/F.No. 160/2/94-ITA-I dated 11-9-1995 issued under section 28 of the Act whereby banking companies were specifically exempt from the levy of interest tax in respect of their income from interest on securities with effect from financial year 1995-96. In this connection it was submitted that this was a Notification by a proper authority by way of delegated legislation which could be struck down only by a High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avour of the assessee as they were rendered on a different footing inasmuch as that they dealt with banking entities whereas the assessee s case pertained to insurance business wherein the meaning of the term investment was in a different context. If the appeals are not to be dismissed, then, it was submitted, the matter should be referred to a Special Bench of the Tribunal. 35. Mr. D.J. Tralshawala, the learned D.R. also supplemented the arguments advanced by Mr. Kapila. Our attention was drawn to paras 4.1 and 4.2 of the CIT(A) s order. The observations of the CIT(A) in these paras are summarized by us in paras 7 and 8 of this order. Then our attention was drawn to paras 5.1, 5.3 and 5.5 of the CIT(A) s order. These observations are summarized by us in para 11 of this order. Pages 13, 16, 19, 20 and 23 of the CIT(A) s order were referred to. The observations on these pages have been noted by us in paras 12, 13, 14 and 15 of this order. 36. After referring to the above-mentioned observations in the order of the CIT(A), two main points were stressed by Mr. Tralshawala. Firstly, it was submitted that since the term loans and advances is not defined in any of the taxing sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, we are concerned with Interest-tax Act, 1974. The title suggested that it was an Act to impose a special tax on interest in certain cases. The adjective special suggests that the tax is special in so far as that it applies to certain class of assessees and that it is interest-specific. For the first time it came into effect from 1-8-1974 and remained in force upto 28-1-1978. It was revived from 1-7-1980 and continued upto 31-3-1985. Finance (No. 2) Act, 1991 again brought into force the Act with effect from 1-10-1991. The operation of the Act has again been suspended since 1-4-2000. In its last reincarnation in 1991, the Act was put into operation with added vigour and vitality. During the first tenure of its operation, the Act was applicable only to scheduled banks. During the second tenure, the definition of scheduled banks was widened to include institutions like IFCI, IDBI, IRCI and ICICI. In the third tenure, the scope was further widened by amending the charging section 4 to include credit institutions and make them liable to tax. Simultaneously, clause (5A) was added in section 2 to define the term credit institution . By the term credit institution was meant, (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it on the terms that the payment is to be deferred) sanctioned by a Scheduled bank in connection with the export of capital plant and machinery outside India; and (v)interest on any loan in foreign currency sanctioned by any corporation or bank referred to in sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) of clause (9) for the import of capital plant and machinery from a country outside India Amended definition : Section 2 : (7) interest means interest on loans and advances made in India and includes- (a )commitment charges on unutilized portion of any credit sanctioned for being availed 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; Much has been argued before us about the expression means and includes appearing in the above definition. The two sides have referred to two different decisions of the Supreme Court. Let us consider those decisions : Mahalakshmi Oil Mills case (supra) relied upon by assessee : The S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uest , as it occurs in section 3. It is not said in terms that charitable bequest shall mean one or other of the things which are enumerated, but that it shall include them. The word include is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import, but also those things which are interpretation clause declares that they shall include. But the word include is susceptible of another construction, which may become imperative, if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions defined. It may be equivalent to mean and include , and in that case it may afford an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably by attached to these words or expression. Looking therefore, at the terms of the definition more closely, it is quite clear that tobacco seeds do not fall within the second or inclusive p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the expression defined so as to comprehend not only such things as they signify according to their natural import but also those things which the clause declares that they shall include. On the other hand, when the term means and includes is used, it indicates an exhaustive explanation of the meaning. 44. In the light of the above discussion, let us consider the definition of the term interest given in the Interest-tax Act. Primarily, the term interest is meant to be interest on loans and advances. But the definition does not stop here. It goes on to include two more items. The two items are commitment charges on unutilized portion of credit and discount on promissory notes and bills of exchange. As per the natural import of the term interest , but for the specific inclusion, these would not have been considered as interest. It is perceived that, though by nature as well as nomenclature, the two items may not strictly be regarded as interest, but they have some hue of interest and hence the meaning of the term interest is extended to include these two items. But the extension has to stop here only and cannot go further. There may be some other items also which, thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of the term interest as per section 2(7) is interest on loans and advances, interest earned on the above mentioned instruments can fall within the definition only if monies put into these instruments can be properly regarded as loans and advances. 46. There is no dispute about the characteristics of bonds, debentures and government securities discussed by the CIT(A) in his order. In fact, the words debentures and bonds are often used interchangeably and sometimes Central or State Government loans are described as Government bonds. In short, these are all fixed interest bearing securities or debt instruments and except where necessary, we shall commonly refer to them as bonds. 47. Much stress has been laid by Mr. Kapila on sections 27A and 27B of the Insurance Act which contain provisions regarding investments. The crux of his argument is that the said provision does not make any distinction between loans and securities. Both are treated as investments. He has also referred to the meaning of the term investment as given in Black s Law Dictionary. Amongst the several meanings, the meaning relevant for our purpose is the placing of capital or laying out of money in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the financial market is, to drive home the point that all the factors discussed above never come into play while advancing a loan to a party. And because of these unique market-oriented characteristics of bonds, debentures and Government securities, the major players of which are the credit institutions, Legislature could never have intended to levy interest tax on interest earned on these instruments. The intention is amply reflected in the speeches of the Finance Minister, both, while reviving the levy as well as while withdrawing the levy. The intention is to make credit costlier or cheaper as the case may be. When credit institutions play to the tune of market conditions in the money market, or vice versa, making or changing investment or disinvestment decisions by the minute, where does the intention of making credit cheaper or costlier lie in all this maze ? Earlier in this para we have mentioned that by investing in these instruments, without doubt, a debtor-creditor relationship is created. But this situation by itself cannot lead us to conclude that assessee has advanced loan to the issuer of the securities. In para 45 above, we have reproduced the meaning of the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t which is earned out of those transactions where the credit institution had the intention to actually finance the borrower. 50. The second item to which the definition is extended is discount on promissory notes and bills of exchange drawn or made in India. Discount here means the deduction made from the amount of a promissory note or a bill of exchange by one who gives value for it before it is due. Thus, such discount, in effect is nothing but rent for making available the money before it is due. The rent would normally cover interest for the period of the bill and some additional charges. The purchaser of the bill is the financier and recovers interest by discounting the bill. Thus, our view expressed earlier gets stronger that tax under the Act is sought to be levied only where there is an inention to actually finance the borrower. One who gets the bill discounted is the borrower. He avails of the finance and pays for it in the form of discount deducted by one who provides the finance. Because of its nomenclature, perhaps discount on promissory notes and bills of exchange may have escaped interest tax, though, in essence it is interest earned on making finance available. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e last limb of the definition. The earlier definition specifically excluded interest chargeable under the head Interest on securities under the Income-tax Act. In the amended definition, this specific exclusion did not find place after the expression but does not include... . Hence, it was argued on behalf of the revenue that since the earlier exclusion is specifically removed, interest on securities gets auto-matically included in the definition of the term interest . We are unable to agree to this contention for the reasons that follow. 54. Firstly, if it was the intention of the Legislature to include interest on securities, while amending the definition in 1991, it could have specifically included it in the upper portion of the definition when commitment charges and discount or promissory notes were specifically included. Hence, Legislature was conscious that interest on securities has not to be taxed under the Act. Only interest on loans made with the sole purpose of financing the borrower is to be taxed. Earlier, we have discussed in detail that this activity of financing the borrower is distinct from investing in securities where yield and capital appreciation is an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest on securities and hence the tax burden will fall on the credit institution itself. This will make investment in Government securities an unattractive proposition and adversely affect the Government s own borrowing programmes. This will obviously be counter-productive as it will have serious fiscal implications. It may be argued that well, the above view may hold good for Government securities, but not for non-governmental bonds and debentures. In our opinion, by subscribing to such bonds and debentures, it does not affect the money market at all. The Legislature was aware of all these economic considerations and, therefore, consciously did not include interest on securities while amending the definition in 1991. When the main definition does not include interest on securities, merely because the specific exclusion is deleted, its automatic inclusion in the main definition cannot be inferred. There is no scope for any intentment. This view of ours gets fortified by the following observations of the Bangalore Bench of the Tribunal in the case of Canara Bank v. Dy. CIT [Int. Tax Appeal Nos. 5 to 8 (Bang.) of 1997, dated 16-9-1997], we reproduce the relevant para 12(i) of the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interpretation as enunciated by the Hon ble Supreme Court; (b)Meaning of loans and advances and securities as understood in the commercial sense; (c)The definitions of government security and promissory note as defined in Public Debt Act, 1944; (d)The economic considerations kept in view by the Legislature; (5)We have also considered the commercial aspects that guide the investor in making investment decisions. 58. We reiterate that deletion of specific exclusion of interest on securities was merely to remove the ambiguity and also because the head Interest on securities had since been deleted in the Income-tax Act. The insertion of the definition of the term Interest on securities in section 2(28B) of the Income-tax Act, 1961 has no impact here. Had it been the intention of the Legislature to tax such interest, it would have easily included in section 2(7) of the Act by saying- Interest means interest on loans and advances made in India and includes- (a)Commitment charges......in India; (b)Discount on promissory notes......In India; and (c)Interest on securities as defined in sub-section (28B) of section 2 of the Income-tax Act...... ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
