S.H Kapadia, J.:— The short question of law which arises for determination is: Whether interest on debentures, bonds and securities is taxable under section 5 of Interest Tax Act, 1974.

FACTS:

2. The petitioner is a Company incorporated under the Companies Act, 1956. It was promoted by RBI, ICICI, UTI, SBI, IDBI, etc. It is an Investment Company as defined under, section 2(5-B)(ii) of the Interest Tax Act, 1974, as it then stood. The petitioner is a dealer in money market instruments such as call/notice/term money, treasury bills, commercial paper, certificate of deposit and Government Dated Securities. The Government Dated Securities Market has two segments viz. Primary Market and Secondary Market. The Primary Market consists of issuers and subscribers. The issuers are Central and State Government. The Secondary Market includes Banks, Financial Institutions, Insurance Companies, Provident Funds, Trusts, Individuals, Primary dealers etc. The petitioner is a primary dealer in Dated Government Securities. The petitioner subscribes to, buys, stocks and trades in Dated Government Securities regularly. At the end of the year the petitioner shows the Dated Government Securities in its Accounts under the Head “Current Assets” as stock-in-hand. The profits on sale of Dated Government Securities as well as the interest earned on Dated Government Securities are shown as business income and are assessed under the Income Tax Act, 1961.

3. On the 1st August 1974, the Interest Tax Act came into force for the first time. It remained in force upto 28th February 1978. It was revived from 1st July 1980. It continued upto 31st March 1985. Thereafter, from 1st April 1985 upto 1st October 1991, it was withdrawn. However, with effect from 1st October 1991, the Act, 1974 was once again revived and it continued upto 31st March 2000.

4. As stated above, the petitioner is an Investment Company. As an Investment Company, it came within the ambit of the expression “Financial Company” as defined under section 2(5-B)(ii) and as a Financial Company it came with the ambit of Credit Institution as defined under section 2(5-a)(iv). As a Credit Institution, the petitioner filed its return of Chargeable Interest for the year ending 31st March 1994 relevant to the assessment year 1994-1995. The Return was filed on 5th December 1994 returning a total Chargeable Interest at Rs. 24.83 lakhs (approximately). The said interest included interest of Rs. 15.69 lakhs received from RBI during the financial year 1993-1994 on Dated Government Securities directly subscribed by the petitioner at the time of its initial issue by the Government. The assessment was completed under section 8(2) of the Act vide Order dated 7th March 1997 accepting the Return of Chargeable Interest, after scrutiny. However, the petitioner came across a Circular issued by RBI under which it was clarified that interest earned on Government Securities does not amount to Interest within the meaning of section 2(7) of the Interest Tax Act. In view of the said Circular (Exhibit - I to the petition), the petitioner filed a Revision Petition on 22nd July 1997 under section 20 of the Interest Tax Act, 1974 contending that the Dated Government Securities held by the petitioner did not represent monies lent to the Government and, therefore, interest earned on such Dated Government Securities was not in the nature of Interest on Loans and thus such interest was not chargeable to tax under section 4 of the Interest Tax Act, 1974. By Order dated 28th February 2002, the Revisional Authority rejected the Revision on the ground that the new claim cannot be considered for the first time under section 20. It was also rejected on merits. The Revisional Authority took the view that the word “interest” is defined under section 2(7) to mean ‘interest on loans and advances’. That the expression “loans and advances” included interest on Dated Government Securities. Accordingly, the Revision Petition filed by the assessee came to be rejected. Being aggrieved, the present petition is filed.

ARGUMENTS:

5. Mr. P.J Pardiwala, learned counsel appearing on behalf of the petitioner contended that the Interest Tax Act was introduced in 1974 for the first time with effect from assessment year 1975-1976. That, thereafter the said Act was dropped and revived from time to time as stated above. He contended that this was because the Act was enacted for two-fold purposes viz. as an anti-inflationary measure and also to augment Government revenues. He relied upon the judgment of the Division Bench of this Court [to which one of us (Kapadia, J.) was a party] in the case of UTI v. P.K Unny, reported in 2002 (1) Mh. L.J 301 : 249 ITR Page 612 in support of his contention that the Act was introduced as an anti-inflationary measure and to augment the revenues. He contended that the petitioner was a trader. That the petitioner has subscribed to Dated Government Securities as a trader. That the petitioner got the securities and they have held those securities as its stock-in-trade. He contended that there was a difference between lending and investing. That the securities were acquired as income-earning assets and not for lending money to the Government. That, when the petitioner subscribes to the Dated Government Securities, it is not giving loan to RBI. That the petitioner acquires the asset by subscribing to the loans of Central and State Governments and thereafter deals with those securities. He contended that the Interest Tax Act applied only to loans and advances and not to investments. He submitted that the Act itself indicates the difference between lending and investment. In this connection, he invited our attention to section 2(5-B)(ii), which includes Investment Company into the definition of “Financial Company”. He contended that under section 2(5-B), a Financial Company covered an Investment Company as also a Loan Company [See section 2(5-B)(iv)]. Accordingly, he submitted that there was a difference between investing and giving loans. He further contended that the word “interest” is defined under section 2(7) of the Act, 1974 to mean ‘interest on loans and advances’. He contended that in view of the express provision of section 2(7) and in view of the difference between loan and investment, the words “interest on loans and advances” cannot cover Dated Government Securities. He once again reiterated that by subscribing to Government Loans, the petitioner is not giving loans to the Government. It forms part of investment on the part of the petitioner. He, therefore, contended that Dated Government Securities do not fall within section 2(7) of the Act. He contended that when a Credit Institution subscribes to Dated Government Securities, it does not intend to finance the borrower. It intends to acquire an asset in which it can trade. The petitioner cannot trade in loans and advances. He contended that the petitioner has an Investment Portfolio and, therefore, it can deal in securities. He pointed out that the Bank has a Loan Portfolio and, therefore, it cannot trade in Loan Portfolio, whereas if an assessee has an Investment Portfolio, it can deal in securities. He invited our attention to the Balance Sheet of the Company and submitted that the petitioner was only a trader and not an investor. He pointed out from the Balance Sheet of the petitioner that there is no investment on the part of the petitioner. That the total turnover of the petitioner in Dated Government Securities at the end of the financial year 31st March 1994 stood at Rs. 14,388 crores. That the securities were held as stock-in-trade under the caption “Current Assets”. In this connection he invited our attention to Schedule V of the Balance Sheet, which refers to Dated Government Securities on hand (at cost) amounting to Rs. 487.63 crores. He also invited our attention to the Profit & Loss Account for the year ending 31st March 1994, which indicates receipt of interest on Dated Government Securities (net) at Rs. 3,226 lakhs. He invited our attention to the various provisions of the Banking Regulation Act, 1949 and the Companies Act to draw up the distinction between loans and investments. He contended that whether the assessee holds the securities as investments or stock-in-trade is of no consequence because under section 2(7), the word “Interest” is defined to mean ‘interest on loans and advances’ and interest on loans and advances cannot mean interest on securities. He contended that under section 6 of the Banking Regulation Act also, the business in which Banking Companies may engage is laid down. It refers to lending as well as buying and dealing in debentures. He contended that in this case, the Court will have to consider the Scheme of the Act as also the object of the Act. He submitted that the object of the Act was to discourage borrowings by various Institutions and in order to discourage borrowings, the cost of borrowings is increased by charging interest tax on the lenders who were entitled to recover such charges from the borrowers. In support of his contention he relied upon section 26-C of the Interest Tax Act, which, inter alia, lays down that notwithstanding anything contained in any agreement under which loan is sanctioned, it shall be lawful for the Credit Institution to vary the agreement so as to increase the rate of interest stipulated therein to the extent to which the Credit Institution is liable to pay the interest tax under the said Act, 1974. He, therefore, submitted that section 26-C supported his argument that the Interest Tax Act was introduced as an anti-inflationary measure to discourage borrowings by making the borrowings costlier. He further submitted that even section 26-C shows that the said Act, 1974 applies only to interest on loans and advances because only loan agreements could have been varied so as to increase the rate of interest stipulated therein to the extent to which the Credit Institution is liable to pay the interest tax under the Act. That, section 26-C could never apply to an investment because in the case of investment such variation could never be incorporated. He, therefore, contended that the Act only applied to interest on loans and advances and not to interest on securities. He contended that section 26-C shows that the said Act, 1974 was applicable only to cases where Credit Institutions could vary the terms of interest. That such variation could not apply to investments.

6. Mr. Pardiwala further contended that in this petition, the petitioner is seeking to raise a jurisdictional issue. That in this petition, the petitioner contends that levy of interest tax on securities was without authority of law and, therefore, section 20 of the Act was attracted. In the circumstances, he contended that the Revisional Authority erred in rejecting the Revision Petition, inter alia, on the ground that the new claim cannot be considered for the first time in the Revision Petition, particularly when the assessee had returned the Chargeable Interest by filing its Return under the Act which Return came to be accepted by the AO. The Revisional Authority held that the interest earned on securities by the assessee was offered for the purposes of interest tax and having offered the assessee cannot be permitted to raise a new claim for the first time under section 20. Mr. Pardiwala contended that the view of the Revisional Authority was erroneous. He contended that the point raised by the petitioner goes to the root of the matter and consequently, the Revisional Authority should have entertained the petition under section 20 of the Act. He further contended that the Revisional Authority erred in coming to the conclusion that section 2(7) covered interest on securities.

7. Mr. R.V Desai, learned senior counsel for the department submitted that prior to 1st October 1991, section 2(7), which defines the word “interest” to mean ‘interest on loans and advances’ including commitment charges and discounts on promissory notes/bills of exchange, but the legislature expressly excluded Interest on Securities. He contended that by Finance No. 2 Act of 1991, the above express exclusion was omitted and, therefore, after 1st October 1991, the legislative intent was clear viz. to tax interest on securities. He contended that because the legislature wanted to include interest on securities within the meaning of the phrase ‘interest on loans and advances’ in section 2(7) of the Act, the legislature dropped the express exclusion from section 2(7). Mr. R.V Desai further submitted that when the petitioner subscribed to Dated Government Securities, the petitioner extended loans to the issuer. He, therefore, submitted that there was no difference between Investment and loans. Mr. Desai submitted that subscribing to the Loans was also a form of advancing loans. He, therefore, contended that there was a deliberate dropping of the exclusionary clause from section 2(7) because the legislature wanted to tax interest on securities as falling within the expression “interest on loans and advances” under section 2(7) of the Act.

FINDINGS:

8. At the outset, we may state that we are confining our case only to the facts of this case. The assessee has argued the matter on a very wide proposition which does not arise in this case. In this case, the only question which arises for determination is: whether gross interest received by RBI during accounting year 1993-1994 on Dated Securities directly subscribed by the Company at the time of initial issue by the Government amounting to Rs. 15,69,41,050/- came within the meaning of the word “Interest” under section 2(7) of the Interest Tax Act, 1974. The petitioner, in its accounts at the year end, shows Dated Government Securities under the head “Current Assets - Stock-in-trade”. The profits on sale of Dated Government Securities as well as interest earned on Dated Government Securities are shown as business income and are assessed, as such, under the Income Tax Act, 1961. Before the Revisional Authority, the main argument advanced on behalf of the petitioner was that the aforestated amount of Rs. 15,69,41,050/- was not taxable under section 2(7) of the Interest Tax Act as the holder of the security, namely, the petitioner was not in a position to pass on the intended interest tax to the issuer of the Dated Government Securities, namely, the Central Government. This argument was rejected. Therefore, the petitioner has filed this petition challenging the impugned order of the Revisional Authority. We are, therefore, required to examine the Act in the context of this argument. The Act came into force with effect from 23-9-1974. It continued to operate upto 31st March, 1978. It was dropped from 1-4-1978 upto 30-6-1980. It was revived from 1-7-1980 upto 31-3-1985. It was once again dropped from 1-4-1985 upto 30-9-1991. It was reintroduced with effect from 1-10-1991 vide Finance No. 2 Act, 1991 and it continued to operate upto 31-3-2000. Thereafter, it has been dropped again. One has to ask a question as to why the Act has been operating intermittently. The object of the Act was to discourage borrowings by increasing the cost of borrowings. This was in 1974. The other object was to increase the revenue. During the period 23-9-1974 upto 31-3-1992, interest rates in India were administered centrally. However, after 1-4-1992, interest rates have been freed and they are fixed by market forces of demand and supply. After 1992, one of the biggest market borrowers is the Government. Therefore, the Act has been operating intermittently depending upon the economy of the country. This has been discussed in the Judgment of the Division Bench of this Court to which one of us (S.H Kapadia, J.) is a party in the case of UTI v. P.K Unny reported in 2002 (1) Mh. L.J 301 : 249 ITR 612. Therefore, the Act is enacted for twofold purposes, namely, as an anti-inflationary measure and, secondly, to augment the revenue. In the said Judgment of the Division Bench of this Court in the case of UTI (supra), it has been held that interest tax is a special tax. It operates as an indirect levy on the borrower. This is indicated by section 26-C of the Act which lays down that a Lender can modify the existing Agreement so as to pass on the burden of interest tax to the borrower. Therefore, keeping in mind the object and the Scheme of the Act we have to interpret section 2(7) of the Interest Tax Act, 1974 which defines interest to mean interest on loans and advances including commitment charges, discount on Promissory Notes but excluding discount on treasury bills. If one reads section 2(7) of the Act, it is clear that an instrument which passes on the burden of interest tax to the borrower is excluded from the definition of the word “interest” in section 2(7) like in the case of discount on treasury bills because, in such cases, the Government is the borrower. Further, loans and advances, as a concept, is different and distinct from investments in the commercial sense as also in the accounting sense as also under sections 370 and 372 of the Companies Act as also under section 29 read with Schedule III of Banking Regulation Act, 1949 as also under section 13(1)(d) and section 11(5) of the Income Tax Act. Similarly, the definition of the word “interest” in section 2(28-A) of the Income Tax Act vis-àvis section 2(7) brings out the difference between lending on one hand and investment on the other hand. Therefore, one has to read section 2(7) in the context of the Scheme of the Act and, if so read, it is clear that gross interest on Dated Government Securities received by the petitioner from RBI amounting to Rs. 15,69,41,050/- cannot fall under section 2(7) of the Interest Tax Act.

9. It has been argued on behalf of the Department that prior to 1st October, 1991 section 2(7) of the Interest Tax Act had an exclusionary clause which excluded interest on securities. That, by Finance No. 2 Act of 1991 which came into force from 1st October, 1991 that exclusionary clause, which excluded interest on Government securities, was deleted and therefore, the legislature intended to charge and levy interest tax on Interest received from RBI on Dated Government Securities. We do not find any merit in this argument. In the case of CIT v. Madurai Mills Co. Ltd. reported in 89 ITR 45, a similar argument was advanced by the Department. In that matter, the question which arose before the Supreme Court was whether capital gains stood attracted on distribution of assets of the Companies in liquidation. It was held by the Supreme Court that distribution of assets of the Companies in liquidation did not amount to transfer under section 12-B(1) of the Income Tax Act, 1922. One of the arguments advanced on behalf of the Department was that prior to Finance No. 3 Act of 1956, there was a proviso in section 12-B(1) of the Income Tax Act, 1922 which excluded such distribution of assets from the word “transfer” in section 12-B(1) of the Act. It was argued that after Finance No. 3 Act of 1956 that proviso was deleted and, therefore, the Parliament intended to levy tax on distribution of assets of the Companies in liquidation. This argument was rejected by the Supreme Court. The Supreme Court held that the proviso to section 12-B(1) was introduced by the Parliament by way of abundant caution. It was clarificatory in nature. That, the main section 12-B(1) itself contemplated exclusion of capital gains from distribution of assets of the Companies in liquidation and, therefore, deletion of the proviso had no effect on the main section 12-B(1). This Judgment of the Supreme Court in Madurai Mills' case (supra) squarely applies to the facts of the present case. In the present case, if one construes section 2(7) in the context of the object of the Act and the Scheme of the Act, it is clear that the main section 2(7) applies only to loans and advances and not to the gross amount of interest received from RBI on Dated Government Securities and that deletion of the exclusionary clause by Finance Act of 1991 had no effect on section 2(7) as the exclusionary clause was only clarificatory in nature. Therefore, there is no merit in the argument advanced on behalf of the Department. Moreover, section 2 is a definition section. It starts by the expression “In this Act, unless the context otherwise requires”. Section 2(7) forms part of definition section. It defines the word “interest” to mean interest on loans and advances. Section 2(7) must be read with the expression “unless the context otherwise requires”. section 26-C provides evidence of the expression “unless the context otherwise requires”. Therefore, section 26-C demolishes the argument of the Department that the word “interest” means interest on Dated Government Securities. One has to read section 2(7) with section 26-C and, if so read, interest received from RBI on Dated Government Securities will not fall within the meaning of the expression “Interest on loans and advances” under section 2(7) of the Act. Accordingly, we hold that the Department was not entitled to levy interest tax on Rs. 15,69,41,050/- received from RBI during the year 1993-1994 on Dated Government Securities as it would mean levy of tax indirectly on RBI under section 26-C of the Act.

10. One of the incidental points, which remains for consideration in this case is: Whether the Commissioner of Income Tax (Revisional Authority under section 20 of the Interest Tax Act) was right in rejecting the Review Application of the petitioner on the ground of non maintainability. Under the impugned Order, it has been held by the Revisional Authority that under section 20 of the Act, the Revisional Authority cannot allow the assessee to raise a claim for the first time, particularly when the assessee has offered the said amount of Rs. 15,69,41,050/- to tax. This finding of the Revisional Authority, in our view, is erroneous. In this case, the assessee has raised a question, which goes to the root of the matter. The point at issue before the Revisional Authority was not concerning a legality of the Order of the AO, but it was concerning lack of authority/jurisdiction. In our view, interest tax was not leviable on the interest received from RBI on Dated Government Securities and consequently, the issue raised concerns lack of authority/jurisdiction on the part of the AO under the Interest Tax Act to levy tax on such interest. Therefore, such an issue was entertainable under section 20 of the Interest Tax Act.

11. Before concluding, we want to clarify one point. Petitioner subscribes to Dated Government Securities of RBI. It receives from RBI half yearly interest on the coupon dates every year. The interest is paid twice in a year on the holding of the petitioner in the SGL account with RBI. Our Judgment applies only to the interest paid by RBI to the petitioner on its holding the Dated Government Securities in the SGL account with RBI. This clarification is required to be made because the petitioner also deals with Dated Government Securities after subscribing to the same. In other words, after subscribing, the petitioner also sells Dated Government Securities under which activity they earn interest as also profits which are shown as business income under the Income Tax Act. Our Judgment, therefore, does not touch the interest received by the petitioner on sale of Dated Government Securities after they are subscribed to. It may be noted that, in this case, we are only concerned with interest received from RBI by the petitioner on the Dated Government Securities held by it on the coupon date. Our Judgment is not concerned with the interest earned on Dated Government Securities which are traded by the petitioner with other institutions thereafter. Therefore, we have confined our Judgment only to the amount of Rs. 15,69,41,050/- which the petitioner has received from RBI as gross interest on Dated Government Securities directly subscribed by the petitioner.

12. Subject to above, petition is allowed in terms of prayer clause (b). No order as to costs.

Petition allowed.