Interest on Government Securities Exempt from Assessment under Section 2(7) of the Interest-tax Act; Case Remanded to Tribunal for Examination of Interest's Nature.

The appeals in this case were filed against the final order passed by the Bombay High Court. The question at hand was whether the interest earned by the assessee bank on government securities was liable to be assessed under Section 2(7) of the Interest Tax Act. The Income Tax Appellate Tribunal had previously held that it was not chargeable, a decision that was upheld by the High Court.

The appellant argued that the Tribunal and the High Court erred in holding that loans and advances do not include interest on securities, bonds, and debentures, and thus should not be subject to tax under the Interest Act. The appellant contended that interest on securities falls within the definition of "Interest chargeable to tax" as defined under Section 2(7) of the Interest Act.

The respondent, the assessee bank, supported the judgment of the Tribunal as upheld by the High Court.

The Supreme Court referred to its previous decision in Commissioner of Income Tax v. Corporation Bank, where it was held that there is a fundamental difference between loans and advances on one hand, and investments/securities on the other. The Court agreed with the view expressed by the Bombay High Court in that case and dismissed the appeals filed by the revenue.

However, in the present case, there was a dispute between the appellant and the respondent regarding whether the interest earned was solely on government securities or not. The Court, therefore, remanded the case to the Tribunal to examine the factual position and determine whether the interest involved in the present case is indeed on government securities. The application of the decision in Corporation Bank's case would depend on the outcome of this examination.

Consequently, the appeals were disposed of, and the matter was remanded to the Tribunal for further examination. The order was passed by Dr. Arijit Pasayat and Dr. Mukundakam Sharma in New Delhi on October 13, 2008.

1. Leave granted.

2. Challenge in these appeals is to the judgment of final order

passed by the Bombay High Court in a group of appeals filed by the

revenue under Section 260A (of Income Tax Act, 1961) (in short the

‘Act’) read with Section 24 of the Interest Tax Act, 1974 (in short

the ‘Interest Act’). Question involved was whether interest earned by

the assessee bank on government securities was liable to be assessed

under Section 2(7) of the Interest Act? The Income Tax Appellate

Tribunal (in short the ‘Tribunal’) held that it was not chargeable.

The High Court by the impugned judgment upheld the view of the

Tribunal. The revenue filed the present appeals against the judgment

of the High Court. It was submitted by learned counsel for the

appellant that the Tribunal and the High Court were not justified in

holding that loans and advances do not include interest on securities,

bonds, debentures and therefore not liable to tax under the

provisions of the Interest Act. It is submitted that interest on

securities falls within the meaning of “Interest chargeable to tax” as

defined under Section 2(7) of the Interest Act.

3. Learned counsel for the respondent assessee-Bank on the other

hand supported the judgment of the Tribunal as upheld by the High

Court.

4. A similar question came up for consideration before this Court in

Commissioner of Income Tax v. Corporation Bank (2008 (166) Taxman

388). This court held as follows:

“Leave granted in special leave petitions.

The short point which arises in this batch of civil

appeals is whether interest earned by the assessees-

banks on dated Government securities was liable to be

assessed under section 2(7) (of Income Tax Act, 1961) read with Section 4 (of Income Tax Act, 1961) of the

Interest Tax Act, 1974. In our view, there is a basic

difference between loans and advances on the one hand

and investments/securities on the other. This

difference is indicated in the provisions of the Income

tax Act, the Companies Act as well as the Bank

Regulation Act. These aspects have been discussed in

detail in two decisions of the Bombay High Court,

namely Discount and Finance House of India Ltd. v. S.K.

Bhardwaj, CIT reported in MANU/MH/0628/2002, as also in

another decision of the Bombay High Court reported in

MANU/MH/0629/2002 in the case of CIT v. United Western

Bank Ltd. It is not in dispute that the revenue has

accepted the aforesaid two judgments of the Bombay High

Court. We are in agreement with the view expressed by

the Bombay High Court.

For the aforestated reasons there is no merit in the

civil appeals filed by the department. The same are

dismissed No order as to costs.”

5. Learned counsel for the appellant submitted that this Court’s

decision related to the interest on government securities. Learned

counsel for the assessee submitted that in the instant case the

interest earned was on government securities only. The stand is denied

by learned counsel for the appellant. Let the Tribunal examine the

factual position as to whether the interest involved in the present

case is on government securities. If that be so, the ratio of the

decision in Corporation Bank’s case (supra) will apply to the facts of

the present case and if the interest earned is not solely on

government securities, the ratio of the decision will not apply.

6. The appeals are disposed of accordingly.

(Dr. ARIJIT PASAYAT)

(Dr. MUKUNDAKAM SHARMA)

New Delhi,

October 13, 2008