TMI Blog1996 (8) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... ank could be regarded as one issued by a company established under a State or Provincial Act and, therefore, the interest is assessable under interest on securities, which is outside the purview of interest for levy of interest-tax under the Interest-tax Act, 1974 ? In the return filed for the assessment year 1975-76, the interest received on debentures from the land mortgage bank was not included. It was contended that the debentures are neither loans nor advances and they are only an investment. This contention was not accepted by the Inspecting Assistant Commissioner. Under section 2(7) of the Interest-tax Act, interest includes all the interest on loans and advances, but it does not include any interest, chargeable to income-tax under the head " Interest on securities ". It cannot be said that the debentures are not loans as contended by the assessee. According to the Inspecting Assistant Commissioner, it is only interest on money loaned or advanced by the assessee The security for the loan may be the debentures, but it is nothing but a loan or advance. Even a Government security is only a loan. This would be evident from the fact that the interest on Government securities is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties ", assessable as such under the Income-tax Act and that such interest on securities is excluded from the purview of the definition of interest for the purposes of the Interest-tax Act. It was found that interest on debentures issued by co-operative societies including a co-operative land mortgage bank specifically comes under section 193 for purposes of deduction of tax from interest on securities as per clause (iib) of section 193 of the Income-tax Act. It could also 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. Since a co-operative society is a corporation with common seal and perpetual succession and since company debenture interest is specifically excluded as per the Objects and Reasons annexed to the Interest-tax Act, 1974, and the Finance Minister's speech introducing the legislation, the debentures issued by co-operative societies being of the same kind as debentures issued by companies, could not have been intended to be brought within the purview of the Interest-tax Act. Before us, learned standing counsel appearing for the Department submitted that the interest paid by the co-opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular No. 665, dated October 5, 1993), has no relevance to the issue arising in the present case. Therefore, the interest received by the assessee-bank on the debentures issued by the co-operative land mortgage bank, would be in the nature of interest received on loans and advances. By no stretch of imagination, can the purchase of debentures be called an investment. Therefore, according to learned standing counsel, the Tribunal was not correct in holding that interest received by the assessee on the debentures purchased by it from the co-operative land mortgage bank would amount to interest on investment. In the matter of considering whether the interest received on debentures would amount to interest on securities, learned standing counsel for the Department submitted that all interest would prima facie fall to be assessed under the Interest-tax Act unless it is specifically exempt under the definition under section 2(7) of the Interest-tax Act. One of the two exemptions under the definition is that the amount chargeable as interest on securities under the Income-tax Act will not be included for purposes of the Interest-tax Act. According to learned standing counsel, the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax under the Income-tax Act, under the head " Interest on securities ", and (ii) discount on treasury bills. Therefore, according to learned counsel appearing for the assessee, interest on debentures is not interest on loans and advances. Debentures represent an investment of the bank and they do not partake of the character of loans and advances. They have to be shown under the head " Investment " in the balance-sheet under the Banking Regulation Act. They are only trusteeship securities and have also been approved and recognised for the purpose of section 24 of the Banking Regulation Act. They are neither debts nor advances and, therefore, the interest received thereon is not exigible to tax under the Interest-tax Act. Consequently, interest on debentures of the co-operative land mortgage bank is assessable under the head " Interest on securities " and since there is a prohibition in the section against inclusion of such interest in the " chargeable interest ", the same should not be taxed. Attention was invited to section 193 of the Income-tax Act, which provides for deduction of tax at source from interest on securities. This section provides that a person responsible for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties, companies and statutory corporations, will not be included in the tax base (sic). Therefore, according to learned counsel appearing for the assessee from the point of view of the assessee, purchase of debentures would amount to investing the amount in approved securities. Learned counsel appearing for the assessee also relied upon the circular issued by the Central Board of Direct Taxes (Circular No. 665, dated 5th October, 1993) in order to show that amounts invested in purchasing the debentures would also amount to investment made in approved securities. However, according to learned standing counsel for the Department what is stated in paragraph 4 of the said circular is concerned with a question, whether a particular item of investment in securities constitutes stock-in-trade or a capital asset. This is a question of fact. This has got to be decided on the basis of facts arising in each case. Therefore, according to learned standing counsel, this circular has no relevance for the present case. We have heard learned standing counsel appearing for the Department as well as learned counsel appearing for the assessee. In the assessment year 1975-76, the assessee had receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government securities, which are assessable under the head " Interest on securities ". But for this exclusion, interest on securities would also represent an item of interest chargeable under the Interest-tax Act. Section 4 of the Interest-tax Act is the charging section, which levies tax on " chargeable interest " of the previous year. Chargeable interest is defined under section 2(5) of the Interest-tax Act to mean the total amount of interest referred to in section 5. Section 5 refers to the total amount of interest, other than interest on loans and advances made to scheduled banks, accruing or arising to the bank in that previous year. Section 2(7) defines " interest " as interest on loans and advances made in India. Under section 2(7)(b)(i) any amount chargeable to income-tax, under the Income-tax Act, under the head " Interest on securities " would not be included as interest under the Interest-tax Act. According to the Tribunal, section 2(7) states that interest means interest on loans and advances made in India and since the word used is " means ", it cannot be said to be not an exhaustive definition. It also includes commitment charges and discount. It is not the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any rate an accurate one--has not been obtained and is perhaps not urgently required. In the Accountancy Text Book by William Pickles, " debenture " is defined as a document, acknowledging a loan to a company and is generally executed under the seal of the company, usually (but not necessarily) containing provisions as to payment of interest and the repayment of the principal and giving a charge on the assets of such company, and may give security for the payment over some or all of the debts and undertakings of the company. In Halsbury's Laws of England, 4th edition, 7th volume, in paragraph 813, the meaning of " debenture " is stated as under : " No precise definition of the word ' debenture ' can be found, but various forms of instruments are called debentures. A debenture is a document which either creates or acknowledges a debt. A document may be a debenture although under its terms, the debt is only to be repaid out of a part of the profits. The term ' debenture ' is usually associated with a company of some kind, and most debentures are securities given by companies, but they are often granted by clubs and occasionally by individuals." In Narendra Kumar Maheshwari v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of a laying out of money either in the purchasing, acquiring or securing of some interest by way of mortgage or otherwise in property, tangible or intangible or in a business enterprise. A mere lending or deposit of money will not be an investment. It must, in some way, be related to property so as to earn an income for a reasonable length of time. " As per section 29 of the Banking Regulation Act, 1949, after the expiry of two years form the commencement of this Act, every banking company shall maintain (in India) in cash, gold or unencumbered approved securities, valued at a price not exceeding the current market price, an amount which shall not at the close the business on any day be less than 20 per cent. of the total of its (demand and time liabilities) in India. Paragraph 4 of the Board's Circular No. 665, dated October 5, 1993, is concerned with whether a particular item in investment in securities constitutes stock-in-trade or a capital asset is a question of fact. Therefore, the Board directed the assessing authorities to determine on the facts and circumstances of each case as to whether any particular security constitutes stock-in-trade or investment ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest received on debentures, one should consider the Interest-tax Act and not the Banking Regulation Act for charging the interest under the Interest-tax Act. However, according to the assessee, they are bound by the Banking Regulation Act in the matter of maintaining the balance-sheet and in the balance-sheet, as per section 29 of the Banking Regulation Act and in accordance with the Third Schedule therein, the assessee-bank has got to make investments to permissible percentage and enter the same under the head " Investment " even though there are other heads in the balance-sheet like advances and loans, etc. As per the decision reported in Delhi Stock Exchange Association Ltd. v. CIT [1961] 41 ITR 495 (SC), the entries made in the balance-sheet or in the account books by the assessee would not be conclusive in the matter of ascertaining the character of the entries made therein. But we have got to see the facts arising in each case while ascertaining the character of the entries made in the balance-sheet or in the account books. In the present case the assessee-bank had an obligation to follow the Banking Regulation Act ; at the same time, the assessee is also answerable to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 280D in respect of any annuity deposit made under Chapter XXIIA). (ii) interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act. (2) Nothing contained in sub-section (1) shall be construed as precluding an assessee from being charged to income-tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income-tax for any earlier previous year." We have to consider whether debentures issued by a land mortgage bank under the Co-operative Societies Act can be taken to be debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act, within the meaning of sub-clause (ii) of sub-section (1) of section 18 of the Act. It was pointed out that a co-operative society, registered under the Co-operative Societies Act has its own seal and perpetual succession having an identity of its own. Therefore, it has got to be treated as a corporate body. There is also no restrictive definition of corporation in the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Government propose to levy a tax on the gross amount of interest received by scheduled banks on loans and advances made in India. The proposed tax will have both a monetary and a fiscal impact in that it will serve the purpose both of raising the cost of borrowed funds and of supplementing Government revenues. The debentures and other securities issued by local authorities, companies and statutory corporations will not be included in the tax base. Interest received on transactions between scheduled banks will likewise be exempted from the proposed levy. Support was also drawn from the Statement of Objects and Reasons annexed to the Interest-tax Act, 1974. The object of this Bill is to impose a special tax on the total amount of interest received by scheduled banks on loans and advances made in India. However, interest on Government securities as also debentures and other securities issued by local authorities, companies and statutory corporations will not be included in the tax base. This would indicate that interest on company debentures is excluded. According to the Tribunal, if interest on company debentures is to be excluded, why should the interest on debentures is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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