TMI Blog2002 (12) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... rest-tax Act, 1974 - we answer the above question in the affirmative, i.e., in favour of the assessee and against the Department. Accordingly, the appeals are dismissed - - - - - Dated:- 4-12-2002 - Judge(s) : S. H. KAPADIA., J. P. DEVADHAR. JUDGMENT The judgment of the court was delivered by S.H. KAPADIA J.-This group of appeals by the Department under section 260A of the Income-tax Act, 1961, read with section 24 of the Interest tax Act, 1974, raises the following question of law for the assessment year 1993-94. Question of law: "Whether, the Tribunal was justified in holding that loans and advances do not include interest on securities, bonds and debentures and, therefore, not liable to tax under the provisions of the Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Appeals) came to the conclusion that the Interest-tax Act was introduced on September 23, 1974. That, in 1974, interest on securities was expressly excluded from the definition of "interest" under section 2(7) of the Interest-tax Act. However, after October 1, 1991, that exclusion was deleted and, therefore, Parliament intended to tax interest on securities under section 2(7) of the Interest-tax Act, read with section 4 of the Act of 1974. Therefore, the appeal filed by the assessee was rejected. Being aggrieved, the assessee carried the matter to the Tribunal which took the view that in view of the judgment of the Madras High Court in the case of CIT v. Lakshmi Vilas Bank Ltd. [1997] 228 ITR 697, interest on securities/debentures was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this Act, there is no difference between investments and loans. He contended that when the bank subscribes to the Government securities, it gives a loan to the Government although in the balance-sheet, it is shown as investments. He, therefore, submits that interest received by the banks on securities and bonds was taxable under the Interest-tax Act, 1974. Mr. Inamdar, learned counsel appearing on behalf of the assessee-banks, contended that the assessee was a bank governed by the provisions of the Banking Regulation Act, 1949. That, under section 29 of the Banking Regulation Act, the assessee was bound to maintain its accounts and balance-sheet in the forms prescribed in the Schedule III to that Act. He invited our attention to Form A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business in which banking companies may engage. He submitted that under section 6(1)(a), banks can engage in borrowing; lending or advancing of money either with or without securities. He, therefore, submitted that lending was an activity permitted by section 6(1) of the Banking Regulation Act which was distinct and separate from investments. He further submitted that the object of the Interest-tax Act was to impose special tax on interest earned by banks and credit institutions in order to discourage borrowings by making the borrowings costlier. He relied upon the judgment of the Division Bench of this court to which one of us was a party, in the case of Unit Trust of India v. P.K. Unny [2001] 249 ITR 612 (Bom), in which this court has dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stribution of assets amounted to transaction of transfer so as to attract section 12B of the Act. It was held by the Supreme Court that section 12B(1) dealt with distribution of assets of the company in liquidation and on liquidation such distribution did not amount to transfer. However, it was argued on behalf of the Department as in the present case that prior to the Finance (No. 3) Act of 1956, there was a proviso to section 12B(1) under which distribution of capital assets on liquidation of a company was expressly excluded from transfer but, by reason of the Finance (No. 3) Act of 1956 that exclusionary clause was deleted and, therefore, the Legislature wanted the distribution of capital assets on liquidation of the company to be treate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer. Therefore, the Interest-tax Act is in force intermittently. Under section 26C of the Interest-tax Act, the lender is empowered to modify the terms of the loan agreement so as to pass the burden on to the borrower which itself shows that the Act applies strictly to loans and advances and not to investments. Section 26C also indicates that the Interest-tax Act is a special tax. That, it provides for an indirect levy on the borrowers. That, if the argument of the Department was to be accepted, the object of the Act would fail because whenever the bank subscribes to Government securities, the borrower is the Government and if the Act is applicable, under section 26C the lender would insist on the Government paying interest-tax which would ..... X X X X Extracts X X X X X X X X Extracts X X X X
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