TMI Blog2009 (11) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in sub-clauses (i) to (v) are empowered to accept 17 deposits - interest tax is not leviable - 5283 OF 2004 - - - Dated:- 24-11-2009 - S.H. Kapadia and H.L. Dattu, JJ. B. Bhattacharya, Arijit Prasad and Rahul Kaushik for the appellant. Percy Pardiwala, Ms. Arohi Bhalla , Subhodh S.Patil, Shekhar Raj Sharma and Ms. Sujatha Kurdukar for the respondents. O R D E R In this batch of Civil Appeals, the main issue which arises for determination is: Whether "interest" which the assessee earned on bonds and debentures was chargeable to tax in view of the definition of the term "interest" in Section 2(7) of the Interest Tax Act, 1974. 2. The Respondent Company is a company registered under the Indian Companies Act, 1956. One of the objects for which the company was incorporated is to buy, sell, invest or otherwise deal in securities, bonds or fixed deposits issued by any institution, body corporate, corporation, establishment constituted under any Central or State laws or any other securities in which the company may be required to invest under any law in force. 3. For deciding the afore-stated issue, one needs to examine the provisions of the Interest Tax Act, 197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lments by way of contributions or subscriptions or by sale of units or certificates or other instruments or in any other manner; or (vi) a miscellaneous finance company, that is to say, a company which carries on exclusively, or almost exclusively, two or more classes of business referred to in the preceding sub-clauses;" "(7) "interest" means interest on loans and advances made in India and includes- (a) commitment charges on unutilised portion of any credit sanctioned for being availed of 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;" "Charge of tax 4.(1) Subject to the provisions of this Act, there shall be charged on every scheduled bank for every assessment year, commencing on or after the 1st day of April, 1975, a tax (in this Act, referred to as interest-tax) in respect of its chargeable interest of the previous year at the rate of seven per cent of such chargeable interest: Provided that the rate at which interest-tax shall be charged in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts of the assessee for the previous year during which it is established to have become a bad debt. Explanation.- For the removal of doubts, it is hereby declared that in computing the chargeable interest of a previous year, no deduction, other than the deduction specified in this sub-section shall be allowed from the total amount of interest accruing or arising to the assessee. (2) In computing the chargeable interest of a previous year, the amount of interest which accrues or arises to the assessee before the 1st day of August, 1974, or during the period commencing on the 1st day of March, 1978, and ending with the 30th day of June, 1980, or during the period commencing on the 1st day of April, 1985 and ending with the 30th day of September, 1991 shall not be taken into account" 4. The Interest Tax Act, 1974 has been enacted with two- fold purposes, namely, as an anti-inflationary measure and for revenue collection. It is an Act which has been periodically passed for economic reasons, particularly when inflation takes over the economy. With this introduction, one needs to examine the provisions quoted herein-above.Section 2(5) defines "chargeable interest" to mean tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said item, namely, "amount chargeable to income tax under the head Interest on securities" stood deleted and, consequently, "interest on securities" would fall within the definition of the word "interest" under section 2(7). According to the Department, section 2(7) was not exhaustive and with the amendment w.e.f. 1.10.1991 when 'Interest on securities' stood excluded, it (interest on securities) would automatically fall within the purview of the word 'interest' under section 2(7) of the 1974 Act. We find no merit in this argument for two reasons. Firstly, as stated above, section 2(7), read as a whole, focuses only on interests accruing on loans and advances, commitment charges and discount on promissory notes and bills of exchange. It also specifically excludes interest under section 42(1B) of the Reserve Bank of India Act as well as discount on treasury bills. It was very easy for the Parliament to expressly provide for "interest on investments" to fall under section 2(7), but that has not been done. The reason is obvious. As stated above, one of the objects of enacting the 1974 Act is by way of an anti-inflationary measure. In an inflationary situation, the cost of borrowin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion for bad and doubtful debts, capital adequacy based on risk weights for assets and credit conversion factors for off balance-sheet items and also relating to deployment of funds by a non-banking financial company or a class of non-banking financial companies or non-banking financial companies generally, as the case may be, and such non- banking financial companies shall be bound to follow the policy so determined and the directions so issued. (2) Without prejudice to the generality of the powers vested under sub-section (1), the Bank may give directions to non-banking financial companies generally or to a class of non banking financial companies or to any non-banking financial company in particular as to- (a) the purpose for which advances or other fund based or non-fund based accommodation may not be made; and (b) the maximum amount of advances of other financial accommodation or investment in shares and other securities which, having regard to the paid-up capital, reserves and deposits of the non-banking financial company and other relevant considerations, may be made by that non-banking financial company to any person or a company or to a group of companies." "45K. P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , to provide for information in specified forms in relation to receipt of deposits including rates of interest payable by non-banking institutions on such deposits as well as the period for which the deposits may be received. Under section 45K(4), if any non-banking institution fails to comply with any of the directions given by the Bank, the Reserve Bank may even prohibit the acceptance of deposits by that non-banking institution. These stringent provisions are made in the Reserve Bank of India Act for a reason that companies like respondent herein receives deposits from the public. To safeguard their interests, the Reserve Bank, as a Regulator, insists that every company, including respondent herein which is a non- banking institution, has to submit its returns in the prescribed form every year and it is in that light that the Reserve Bank of India has specifically issued what is called as Residuary Non-Banking Companies (Reserve Bank) Directions, 1987. 10. Under para 6 of the 1987 Directions, every residuary non-banking company has to deposit and keep deposited in fixed deposits with public sector banks or invest and keep invested in unencumbered approved securities or in othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eposited in fixed deposits and the investments made are not less than the aggregate amounts of liabilities to the depositors as on 30th June and 31st December of that year. Explanation.-For the purpose of this paragraph- (a) "aggregate amounts of liabilities" shall mean total amount of deposits received together with interest, premium, bonus or toher advantage by whatever name called, accrued on the amount of deposits according to the terms of contract; (b) "approved securities" means, the securities in which the trustee is authorised to invest trust money by any law for the time being in force in India and bonds or fixed deposits issued by any corporation established or constituted under any Central or State enactments; (c) "public sector banks" means, the State Bank of India, the subsidiary banks and the corresponding new banks referred to in section 45(1) of the Reserve Bank of India Act, 1934 (2 of 1934); (d) "unencumbered approved securities" shall include the approved securities lodged by the company with another institution for advance or any other credit arrangements to the extent to which such securities have not been drawn against or availed of." 11. The obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-banking company. We quote herein-below para 2: "These directions shall apply to every residuary non-banking company, that is to say, a non-banking institution, being a company, which receives any deposit under any scheme or arrangement, by whatever name called, in one lump sum or in instalments by way of contributions or subscriptions or by sale of units or certificates or other instruments, or in any other manner and which, according to the definitions contained in the Non-Banking Financial Companies (Reserve Bank) Directions, 1977, or, as the case may be, the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977, is not- (i) an equipment leasing company; (ii) a hire purchase finance company; (iii) a housing finance company; (iv) an insurance company; (v) an investment company; (vi) a loan company; (vii) a mutual benefit financial company; and viii) miscellaneous non-banking company" 13. On reading para 2 of the 1987 Directions, it becomes clear that a residuary non-banking company is a company which receives deposits under any scheme or arrangement by way of contributions or subscriptions or by sale of units, certificates or other instrumen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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