Interest on Government Securities Not Taxable under Section 2(7) (of Income Tax Act, 1961) of Interest-tax Act; Case Remanded to Tribunal for Factual Examination.

The appeals in this case were filed by the revenue against the judgment of the Bombay High Court. The question at hand was whether interest earned by the assessee bank on government securities should 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 view that was upheld by the High Court. The revenue argued that the Tribunal and the High Court erred in excluding interest on securities, bonds, and debentures from the scope of loans and advances under the Interest Act. They contended that interest on securities should be considered "interest chargeable to tax" as defined in Section 2(7) of the Interest Act. On the other hand, the respondent bank supported the decision of the Tribunal and the High Court.

The Supreme Court referred to its earlier decision in Commissioner of Income Tax v. Corporation Bank, which held that there is a distinction between loans and advances and investments/securities. It agreed with the view expressed by the Bombay High Court in Discount and Finance House of India Ltd. v. S.K. Bhardwaj and CIT v. United Western Bank Ltd., stating that loans and advances do not include interest on securities. The court dismissed the appeals filed by the revenue, and the matter was remanded to the Tribunal to examine whether the interest involved in the present case is solely on government securities. If it is, the ratio of the decision in Corporation Bank's case will apply; otherwise, it will not.

1. 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 Income Tax Act, 1961) 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 Income Tax Act, 1961) of the

Interest Act.

2. Learned counsel for the respondent, assessee-Bank on the

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

High Court.

3. 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) read with Section 4 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.”

4. 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.

5. The appeals are disposed of accordingly.