TMI Blog1999 (10) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... -company was incorporated on 11th August, 1987 and its main objects are reproduced in para-7 Page 4 of the C.I.T.(A)'s order for the Asst. Year 1992-93. The objects as per the memorandum are in confirmative with the Residuary Non Banking Company (Reserve Bank) Directions, 1987. 3.2 Reserve Bank classified the Appellant-Company as a Residuary Non Banking Company (R.N.B.C.) within the meaning of R.N.B.C. Directions, which were notified by the Government vide Notification No. DFC.55/ DC(O)-87 dated 15-5-1987 and the assessee was informed of the same as per letter dated 16th September, 1987. 3.3 When the Interest Tax Act of 1974 was amended by the Finance (No. 2) Act of 1991 w.e.f. 1-10-1991 a Residuary Non-Banking Company was not included within the definition of a 'Financial Company'as defined in Section 2(5B). 3.4 A Residuary Non Banking Company was included in definition of the Financial Company in section 2(5B) by inserting clauses (va) by Finance Act of 1992 w.e.f. 1-4-1993. The explanatory memorandum to the Act in Paragraphs 55.3 to 55.5 stated as under: "55.3 When the Interest Tax Act was revived last year, the intention was to cover all Non-Banking Financial Compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, as its principal business, the acquisition of shares, stock, bonds, debentures, debenture stock, or securities issued by the Government or a local authority or other marketable securities of a like nature.' 3.6(iii) Applying the definition of an Investment Company under the Finance Act, the C,I.T.(A) held that this definition apply to the Appellant Company. The C.I.T.(A) thereafter referred to the definition of a loan Company as defined in Section 2(5B)(iv) of the Interest Tax Act, which reads as under: "a loan Company, that is to say, a Company (not being a Company) referred to in Sub-clauses (i) to (iii) which carries on, as its principal business, the business of providing finance, whether by making loans or advances or otherwise.' 3.6(iv) In view of above, the C.I.T.(A) was of the view that this definition applies to the Appellant-Company. The C.I.T.(A) was of the view that since almost 5096 of the gross income was from securities and dividends, the Appellant had been rightly treated by the A.O. as a 'Miscellaneous Finance Company'. 3.6(v) The above view of the C.I.T.(A) that the appellant is Miscellaneous Non-Banking Company was taken despite the fact that in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (vi) of Section 2(5B) of the Interest Tax Act as under: "a Miscellaneous Finance Company, that it to say, a Company which carries an exclusively, or almost exclusively, two or more clauses of business, referred to in the preceding sub-clauses." It is seen from the above that in order to fall within the ambit of Miscellaneous Non Banking Company, the appellant company must be carrying on exclusively or almost exclusively as its principal business 'the business of an investment company' as defined in sub-clause (it) or of a loan company as defined in sub-clause (iv) of section 2(5B) of the Interest Tax Act, which is not the case here. 4.1 The Residuary Non Banking Company (R.N.B.C.) Directions in Part II. clearly state that a Residuary Non-Banking Company is not- (a) (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. (b) Further referred to regulation No. 6, Explanation 1(b)(2), Explanation 3, Part-3 item Nos. 7 8, of Appendix 119, item Nos. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pages-31 to 60 of the assessee's Paper Book - and the R.B.I.'s letter dated 16-9-1987 written to the assesee (copy at page-33 of the Assessee's Paper Book), we have no doubt about the nature/status of the assessee company which, in our view, was definitely that of a 'Residuary Non Banking Company' and since it was not carrying on any other business except as listed under object- 1, the conditions for a company to be a miscellaneous company as defined under section 2(5B)(vi) were not satisfied. Consequently, prior to insertion of clause 2(5B)(via) with effect from 1-4-1993, according to which Residuary Non Banking Companies were also brought within the definition of 'financial company', the assessee company was not liable to interest tax. We hold accordingly. Ground Nos. 7 to 9 of Interest Tax Appeal No. 1 (All) of 1996 and Ground Nos. 5, 6 7 of Interest-tax Appeal No. 2(All) of 1996: 6. The next issue pertains to whether the interest earned by the appellant company on investments in securities can be considered as interest which is chargeable to tax under the Interest Tax Act. 7. We have heard the parties and the brief facts appearing from the records and necessary for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lending is judicially noticed in the following manner 'As the expression 'Lend' and 'invest' are sought to be made applicable in different situations, the legitimate inference is that they bear a distinct interpretation. In commercial parlance, lending is associated with advancing money for an agreed rate of interest returnable within a specified period or on demand. Though the expression 'invest' in a broad sweep takes a lending also, it should be considered as confined to the laying out of an amount in a venture or institution with a profit motive and with no promise of assured return. In the process of investment, an element of risk is involved and the expectation of return or profit is not assured and the depletion of capital itself is not an abnormal feature. In the case of lending, the return by way of interest is generally assured and the element of risk is minimal.' The above observation is made out by their Lordships in the case of CIT v. Polisetty Somasundaram Charities [1990] 183 ITR 377 (A.P.). Keeping in view the aforesaid principle the amount in the securities in the nature of loans advances and interest therefrom has rightly been brought within the scope of ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Reserve Bank of India Act, 1934 (2 of 1934); (ii) Discount on treasury bills. 8.2 Elaborating the principles of 'Interpretation of Statutes' submitted that the definition, while defining interest uses the words 'means' and 'includes', which has to be taken as a special definition of the term 'interest'. According to the Id. Sr. counsel, the settled principal of interpretation of a definition, where the word 'means' is used or the words' means and includes' are used, is that it is an exhaustive definition and nothing more than what is stated has to or can be read into the definition. 8.3 In support of this, he relied on the judgment of the Supreme Court in the case of Mahalaxmi Oil Mills v. State of Andhra Pradesh [1989] 1 SCC 164 wherein the Hon'ble Supreme Court had to deal with the definition of the word 'tobacco' as defined in Schedule-I Item-4 of the Central Excise and Salt Act, 1944. The definition reads as under: 'Tobacco means any form of tobacco whether cured or uncured and whether manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest' so as to fall within the purview of this definition of 'interest given in section 2(7) of the Interest Tax Act and negativing such an interpretation and after referring to the definition of the term 'interest' under section 2(7) of the Act, under which 'interest' has been defined to mean - (a) Interest on loans and advances made in India; (b) to include commitment charges on unutilised portion of any credit institution for being Government of India and discount on promissory notes and bills of exchange drawn or made in India; (c) but does not include interest referred to in section 42(1B) of the RBI Act and discount of treasury bills; submitted that since interest on securities does not fall within what is included in the definition of interest, i.e., commitment charges or discount on promissory notes and/or bills of exchange nor it is covered by what it does not include interest on deposits kept under the provisions of section 42(1B) of the RBI Act on discount of treasury bill. The sole point to be examined is whether interest on securities can be said to be covered by the concept of 'loans and advances'. 8.7 It is also settled principle of law that the words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence of a specific exclusion in the newly inserted definition of interest by the Finance Act, 1991 can it be said that interest on securities would now stand covered and to decide the issue submitted that in the present definition, as stated earlier, since interest on securities is not specifically included nor specifically excluded, it will have to be determined whether interest on securities would stand covered by the concept of 'loans and advances' and to decide this, he submitted that when the Interest Tax Act was introduced in 1974, the statement of Object and Reason for introducing the Bill was stated as under (96 ITR St. 31): '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.' The notes on clauses to the said bills also clarify as under (96 ITR St. 31): 'Sub-clause (7) of this clause defines 'interest'. According to the definition, 'interest' means interest on loans and advances made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties is deleted; it does not mean that the Parliament wanted to include interest on securities within the purview of the Act. It may be other-wise, i.e., Parliament omitted to make an exclusion clause to correct the previous wrong drafting. Elaborating this point, be submitted that in the unamended definition, the exclusion clause seems to have been incorporated due to misdrafting and now the same has been corrected. He further submitted that in order to determine whether loans and advances will cover interest on securities, the following factors need to be considered : (a) The Appellant Company is Residuary Non Banking Company and as per the R.N.B.C. Directions, 1987, section which provides mandatorily that every R.N.B.C. Company shall invest and include in accordance with the provisions of said section. Sub-section (B) to the said section provides that not less than 60% of the liability to the depositors shall be invested or depositors of the commercial Bank, paper of the Government company or public sector Bank or public financial corporation or any other company incorporated under the Companies Act. The Appellant Company has invested any debentures in accordance with the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and advances and investments in section 6(1)(a). Similarly, the Reserve Bank of India Act also makes a similar distinction between loans and advances and income from investments/debentures in section 17 as well as section 45-1 Explanation II(c). (e) Even under the Companies Act, distinction is drawn between the loans and advances and investments in sections 370 and 372 of the Act. Section 370 deals with the loans and advances whereas section 372 deals with the investments and in sub-section (12) of section 372 it is stated that investments would be deemed to include debentures. A debenture has been defined under the Companies Act section 2(12) to include debentures/bonds and any other securities of a company where constituting a charge on the assets of the Company or not. The treaties on the Companies Act by Ramaiya, 14th Edition (1998) on page 32 draws a distinction between debentures and a loan: "Since a debentures means a document which creates or acknowledges a debt, the distinction between a debentures and a loan can be understood from the following passage, 'The substance of a loan is a right in the creditor to demand repayment and the substance of a debt is a liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29 of the said Act, and the third schedule thereto, banking companies have to make investments to the prescribed percentage and enter the same under the head 'investments', even though there are other heads in the balance sheet like advances and loans etc. Where Banks so debenture under the head 'investments' the debentures are in the nature of securities. Interest on such debentures must be treated as interest on investments, which fall outside the purview of the Interest Tax Act, 1974, and not as interest on loans and advances taxable under the Interest Tax Act, 1974." (ii) The Karnataka Bank v. Dy. CIT [1998]. It is an order of the Bangalore Bench of the Tribunal in 60 TTJ (Bang.) 103. The Bangalore Tribunal held as follows : 'In the definition of 'interest' in the Interest Tax Act, 1991, 'Interest on securities' has not been mentioned at all and is silent while in the 1974 Act it was specifically excluded. Therefore, one can look into the speech of the Finance Minister to see whether the definition takes in its stride 'Interest on securities' also. The expression 'means' and 'includes' in the definition is exhaustive and not extensive and thus the definition of 'interest' i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) Definition of interest under section 2(7) is exhaustive, (iii) Interest on security/debenture/FDRs is not the interest on loans/ deposits. The CIT further held as under: 'I have considered the submissions raised on behalf of the appellant and when the issue was decided earlier by the CIT(A) the benefit of the judgment of the Madras High Court and the judgment of the Bangalore Bench of the Tribunal referred to by the Id. counsel was not available to the CIT(A). I have carefully considered the submissions and gone through the judgment of the Madras High Court and the judgment of the Tribunal referred to by the learned representative and in my opinion in both these judgments the issue has been decided in favour of the appellant. The Tribunal in para 12(i) held as below: 'We have to hold that though interest on securities has not been specifically excluded from the purview of Interest Tax Act (No. 45/ 1974), there is no circumstance available to hold that interest on securities is intended to be taxed under the provisions of Interest Tax Act (45/1974) as amended by Finance Act, 1992. As stated earlier, exclusion of interest on securities from the taxability to interest tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .4 The Special Counsel submitted that reliance could not be placed on the judgment of Madras High Court in the case of Lakshmi Vilas Bank Ltd. as that was the judgment rendered prior to the amendment by the Interest Tax Act, 1991. 9.5 The Special Counsel also relied on the judgment of Andhra Pradesh High Court in the case of Polisetty Somasundaram Charities which was relied on by the CIT(A). 9.6 Referring to the meaning of the term 'loan', as given in the Black's Dictionary, definitions of Government securities, as defined under section 2(2) of the Public Debts Act, 1974, and also the CBDT's instructions, according to which the CBDT, while clarifying the impact of amendment in section 2(7) of this Act, has clarified that interest on debentures after the amendment was taxable under the Act, the Special Counsel submitted that under the doctrine of interpretation of Statutes a definition, which defines a particular word to 'mean' 'A' and to include 'B' and 'C', then it does not mean that the definition is confined to 'A', 'B' and 'C' only and does not include the natural meaning of 'A'. The ld. counsel further relied on the decision of the Supreme Court in Jagir Singh's case . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of section 26C of the Interest Tax Act. (e) As stated earlier by the Supreme Court in several cases cited above, whatever the 'means' and 'includes' have been used in a definition, the definition is exhaustive and complete and nothing further can be refer-red or read into the definition. This view is also supported by treaties on interpretation by Justice G.P. Singh Pages 146 to 147 and also by the Landmark by Maxwell on the Interpretation of Statutes 12th Edition Page 272. (f)Interest in section 2(7) has been defined to mean 'Interest on loans and advances' made in India and while interpreting the words 'loans and advances' one has only to look what is clearly stated. There is no room for any intendment in interpreting these words as has been held by the Supreme Court and referred to earlier. (g) Loans and advances and investments in securities/debentures have been consistently recognised in several analogous laws has been different in specie and not the same. Even under the Residuary Non Banking Companies Directions, 1987, under which appellant is governed, this distinction is recognised. 10.1 The Special counsel by relying on the judgment of the Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1991, has clearly held that debentures which were acquired by the Bank as investment in accordance with the requirements of Banking Regulation Act could not be considered to be loans and advances within the meaning of section 2(7) of the Interest Tax Act. 10.3 The ld. counsel further submitted that in coming to this conclusion, they have decided the matter on merits and not based their conclusions on sub-clause (i) of the section 2(7) of the prior amended provisions excluding interest on securities. He further pointed out to the observation of the Madras High Court on pages 709 710 which reads as under: "The Income-tax Act did not define 'debentures'. To understand the meaning of the word 'debentures' we have to depend upon various other enactments as mentioned hereinbefore. Considering those aspects and the fact that the assessee is also obliged to follow the provisions of the Banking Regulation Act, we are of the opinion that the conclusion arrived at by the Tribunal in holding that the interest on debentures is interest on investment, is nut in violation of any of the recognised meanings given to the word 'debenture' in various other enactments. Further, it also remains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case is misplaced. It was finally submitted in view of various submissions that: (a) In the assessment year 1992-93 the appellant was a RNBC Company and, therefore, did not fall within the purview of the Interest Tax Act. The assessment year 1992-93 it could not be classified in law as a Miscellaneous non Banking Company on the facts and circumstances of the case and in law. (b) That interest earned on investments made in securities/debentures would not be covered by the definition of 'interest' in section 2(7) even after the amendment by the Finance Act, 1991. 11. We have considered the rival submissions, facts and circumstances of the case, provisions of law and the case laws referred to by the parties carefully and are of the opinion that for the decision of the issue involved here, it is necessary to decide two more questions, namely, (i) the first question relates to the scope of the term 'interest' as defined under section 2(7) of the Act, and (ii) the second question relates to the nature of investments made in securities, i.e., whether the investments made by the assessee were by way of 'loans' or 'advances' as appearing in section 2(7) of the Act or were pure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut also those things which the clause declares that they shall include. The words 'means and includes', on the other hand, indicate 'an exhaustive explanation of the meaning which, for the purposes of the Act, most invariably be attached to these words or expression'.' Reference was also made to the judgment of Supreme Court in the case of Punjab Land Development and Reclamation Corpn. Ltd. where Supreme Court has held that, 'When a statute says that a word or phrase shall 'mean' the definition is hard and fast definition and no other meaning can be assigned to the expression then is put down in the definition. Such a definition is an explicit statement of the full connotation of a term.' 11.4 So far as the submission of the Id. Special Counsel for the revenue are concerned, we are of the opinion that the submission that the question of exclusion of something arises only when 'that something' has already been included and the submission that exclusion clause omitted in the amended definition of the term 'interest' under section 2(7) of the Act by which the interest on securities was excluded from the ambit of the 'interest' signifies that the definition of the term 'intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1973] 88 ITR 192, 195 (SC), Alladi Venkateswarlu v. Govt. of Andhra Pradesh [1978] 41 STC 394, 398 (SC). 11.7 In view of above discussion, the fact remains that the provisions of section 2(7) of the Act, as they stood at the relevant time, are couched in a language which is not free from ambiguity and admits of two interpretations. That being the case, we, in view of the settled proposition of law on the resolution of ambiguity, are of the opinion that the interpretation, which is favourable to the assessee, should be adopted and we do so. 11.8 Having held as above, the next question for our consideration is whether the investment made by the assessee was in the nature or form of 'loans' or 'advances' and our answer is 'no' because first of au, the investments have been made in compliance to the statutory directions of the RBI and not during the course of carrying on of business of making of such investments and secondly the provisions of section 2(5B)(ii) and 2(5B)(iv) of the Act, and the provisions of section 6(1)(a) of the Banking Regulation Act clearly spell out a distinction between interest on securities and interest on loans and advances. Under the Companies Act also, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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