9911796707
TMI Blog2002 (12) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... et 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 Income-tax Act, 1961. On August 1, 1974, the Interest-tax Act came into force for the first time. It remained in force up to February 28, 1978. It was revived from July 1, 1980. It continued up to March 31, 1985. Thereafter, from April 1, 1985, up to October 1, 1991, it was withdrawn. However, with effect from October 1, 1991, the Act of 1974 was once again revived and it continued up to March 31, 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 section 2(5B)(ii) and as a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes, viz., as an antinflationary 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 v. P. K. Unny [2001] 249 ITR 612 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 le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious 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 section 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 section 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 section 26C of the Interest-tax Act, which, inter alia, lays down that notwithstanding anything contained in any agreement under which loan is sanct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He further contended that the revisional authority erred in coming to the conclusion that section 2(7) covered interest on securities. Mr. R.V. Desai, learned senior counsel for the Department, submitted that prior to October 1, 1991, section 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 October 1, 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 section 2(7) of the Act, the Legislature dropped the express exclusion from section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, up 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. 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 v. P.K. Unny [2001] 249 ITR 612 (Bom). Therefore, the Act is enacted for twofold 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 [2001] 249 ITR 612, it has been held that interest-tax is a special tax. It operates as an indirect levy on the borrower. This is indicated by section 26C of the Act which lays down that a lender can modify the existing agreement so as to pass on the burden of interest-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer under section 12B(1) of the Indian Income-tax 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 section 12B(1) of the Indian Income-tax 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 section 12B(1) was introduced by Parliament by way of abundant caution. It was clarificatory in nature. That, the main section 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 section 12B(1). This judgment of the Supreme Court in Madurai Mills Co. Ltd.'s case [1973] 89 ITR 45, squarely applies to the facts of the present case. In the present case, if one construes section 2(7) in the context of the object of the Act and the scheme of the Act, it is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 Assessing Officer under the Interest-tax Act to levy tax on such interest. Therefore, such an issue was entertainable under section 20 of the Interest-tax Act. 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 Income-tax Act. Our judgment, therefore, does not touch the interest received b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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