C.I.T Kolkata II v. Pilani Investment & Industries
[Citation -2015-LL-0311-45]

Citation 2015-LL-0311-45
Appellant Name C.I.T Kolkata II
Respondent Name Pilani Investment & Industries
Court HIGH COURT OF CALCUTTA
Relevant Act Income-tax
Date of Order 11/03/2015
Judgment View Judgment
Keyword Tags interest on securities • government securities • unit trust of india • credit institution • financial company • rate of interest • interest earned • reserve bank • interest tax • interest-tax
Bot Summary: The questions proposed by the revenue are as follows: Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that interest tax is not leviable on interest on bonds and debentures Whether in view of clear instruction No.1923 dated 14.3.1995 of the CBDT and the provisions of section 2(7) which removed the specific exclusion clause in the definition of chargeable interest, interest on bonds and debenture should be included as chargeable interest under the Interest Tax Act Although the revenue has proposed two questions, there is only one question which is the question no.1. Question no.2 indicates the reason why according to the revenue interest earned from bonds and debentures should be 2 open to taxation under the Interest Tax Act. The deletion of the specific exclusion of the interest on securities is merely to remove the ambiguity and also because the head interest on securities has since been deleted in the Income Tax Act. Ms. Das Dey, learned Advocate appearing for the appellant, contended that the original definition of interest as appearing in the Interest Tax Act, 1974 has undergone a sea change. Section 2(7) of the Interest-tax Act now defines interest as under: interest means interest on loans and advances made in India and includes- commitment charges on unutilised portion of any credit sanctioned for being availed of in India; and discount on promissory notes and bills of exchange drawn or made in India, but does not include- interest referred to in sub-section of section 42 of the Reserve Bank of India Act, 1834; discount on treasury bills. The question is whether interest earned from debentures and bonds is open to taxation under the Interest Tax Act The definition of interest appearing from section 2(7) of the Interest Tax Act, 1974, is as follows: interest means interest on loans and advances made in India and includes- commitment charges on unutilised portion of any credit sanctioned for being availed of in India; and discount on promissory notes and bills of exchange drawn or made in India, but does not include- interest referred to in sub-section of section 42 of the Reserve Bank of India Act, 1934; discount on treasury bills; From a plain reading of definition, it is clear that an investment made by an assessee either in bonds or in debentures was not contemplated. The legislature has not provided for inclusion of interest earned from bonds and debentures within the purview of the Interest Tax Act.


ORDER SHEET ITA 313/2005 IN HIGH COURT AT CALCUTTA Special Jurisdiction(income tax) ORIGINAL SIDE C.I.T KOLKATA II Versus PILANI INVESTMENT & INDUSTRIES BEFORE: Hon'ble JUSTICE GIRISH CHANDRA GUPTA Hon'ble JUSTICE ARINDAM SINHA Date : 11th March, 2015. Ms. S. Das Dey, Adv. for appellant. Mr. S. Das, Adv., with Mr. A. Chowdhury, Adv. for respondent. Court : subject matter of challenge in this appeal is judgment and order dated 28th February, 2005, by which learned Tribunal held that interest earned from debentures and bonds are not exigible to interest tax. Aggrieved by order of learned Tribunal, revenue has come up in appeal. questions proposed by revenue are as follows: (I) Whether on facts and in circumstances of case, Tribunal was right in holding that interest tax is not leviable on interest on bonds and debentures? (II) Whether in view of clear instruction No.1923 dated 14.3.1995 of CBDT and provisions of section 2(7) which removed specific exclusion clause in definition of chargeable interest, interest on bonds and debenture should be included as chargeable interest under Interest Tax Act? Although revenue has proposed two questions, there is only one question which is question no.1. Question no.2 indicates reason why according to revenue interest earned from bonds and debentures should be 2 open to taxation under Interest Tax Act. learned Tribunal, in deciding matter, relied upon judgment of Bobmay High Court in case of Discount and Finance House of India Ltd., reported in (2003) 259 ITR 295, delivered by His Lordship Kapadia, J. (as His Lordship then was). In aforesaid judgment, object of interest tax was considered and Their Lordships, inter alia, held as follows: This has been discussed in judgment of Division Bench of this court to which one of us (S.H.KAPADIA,J.) is party in case of Unit Trust of India v. P.K. Unny [2001] 249 ITR 612 (Bom). Therefore, Act is enacted for two-fold purposes, namely, as anti-inflationary measure and, secondly, to augment revenue. In said judgment of Division Bench of this court in case of Unit Trust of India [2001] 249 ITR 612, it has been held that interest-tax is special tax. It operates as indirect levy on borrower. This is indicated by section 26C of Act which lays down that lender can modify existing agreement so as to pass on burden of interest-tax to borrower. In present case, assessee is financial company within meaning of section 2(5B) of Interest Tax Act, 1974. interest earned is from debentures and bonds. learned Tribunal, inter alia, held as follows: Thirdly and most importantly it is common knowledge that rates of interest on securities cannot be varied by investors. provisions have to be interpreted in manner which will advance object of legislature. levy is expected to have monetary impact. It is only by making credit costlier, its flow in market can be restricted and have desired monetary impact. similar impact cannot be achieved by taxing interest on securities. Further, physical impact sought to be achieved by levy is by way of collection of interest tax revenues. On other hand, 3 however, interest on government securities is to be taxed, it will have adverse impact on fiscal aspect. This is because credit institution cannot vary rate of interest on securities and hence tax burden will fall on credit institution itself. This will make investment in government securities unattractive proposition and adversely affect government s own borrowing programmes. This will obviously be counter productive as it will have serious fiscal implications. It may be argued that above view may hold good for government securities but not for non- governmental bonds and debentures. However, by subscribing to such bonds and debentures it does not affect money market at all. legislature was aware of these economic considerations and, therefore, consciously did not include interest on securities while amending definition in 1991. When main definition does not include interest on securities merely because specific exclusion is deleted, its automatic inclusion in main definition cannot be inferred. There is no scope for any intentment. deletion of specific exclusion of interest on securities is merely to remove ambiguity and also because head interest on securities has since been deleted in Income Tax Act. insertion of definition of term interest on securities in section 2(28B) of Income Tax Act has no impact in instant case. We are of opinion that view taken by learned Tribunal is unexceptionable. Ms. Das Dey, learned Advocate appearing for appellant, contended that original definition of interest as appearing in Interest Tax Act, 1974 has undergone sea change. Originally, there was exclusion in favour of interest earned on securities which was chargeable to incomes under Income Tax Act. amendment brought in 1991 has removed aforesaid 4 exclusion. Therefore, it follows that merely because interest earned from debentures or bonds is chargeable to tax under Income Tax Act, it cannot be said that such interest is immune from applicability of Interest Tax Act, 1974. She, in support of her submission, relied upon departmental instruction being Instruction No.1919, dated 14th March, 1995, which reads as follows: Interest-tax Act, 1974, was last revived with effect from 1-10- 1991. Some credit institutions have sought clarification as to whether interest received on debentures etc. is subject to interest tax under present provisions of Act. Such interest was not subject to interest-tax under earlier version of Act. 2. latest version of Act covers larger tax base than earlier one as definition of interest now is wider in scope. Section 2(7) of Interest-tax Act now defines interest as under: (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 Reserve Bank of India Act, 1834 (2 of 1934); (ii) discount on treasury bills. In earlier version of Interest-tax Act, any amount chargeable to income-tax, under Income-tax Act, under head Interest on Securities was specifically excluded. 3. Board have been advised that by not incorporating such exclusionary provision in present version of Interest-tax Act, natural meaning of word interest as defined in 5 section 2(7) of Act will have to be given effect. Therefore, interest on debentures, bonds, securities, etc. is exigible to interest-tax. inter-departmental instruction is no aid for construing Act. Therefore, that instruction is altogether irrelevant for purpose of resolving issue. question is whether interest earned from debentures and bonds is open to taxation under Interest Tax Act? definition of interest appearing from section 2(7) of Interest Tax Act, 1974, is as follows: (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 Reserve Bank of India Act, 1934 (2 of 1934); (ii) discount on treasury bills; From plain reading of definition, it is clear that investment made by assessee either in bonds or in debentures was not contemplated. What has been contemplated is loans and advances. investment made in bonds and debentures can by no stretch of imagination be considered to be either loan or advance. In pith and substance, it may have some affinity with concept of loan and advance, but it is not possible to presume that legislature was unaware of distinction between investment in bonds and debentures and loans and advances. legislature has not provided for inclusion of interest earned from bonds and debentures within purview of Interest Tax Act. If we look at object sought to be achieved by Act as discussed by Bombay High Court in case of Discount and Finance House of 6 India Ltd.(supra), object cannot be achieved by roping in interest earned from debentures and bonds. We are as such of opinion that view taken by learned Tribunal is perfectly justified view and no interference is called for. question no.1 is answered in affirmative. question no.2 need not be answered. appeal is thus disposed of. (GIRISH CHANDRA GUPTA, J.) (ARINDAM SINHA, J.) tk C.I.T Kolkata II v. Pilani Investment & Industrie
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