S.H Kapadia, J.:— This group of Appeals by the Department under section 260-A of the Income-tax Act, 1961 read with section 24 of the Interest-tax Act, 1974 raises following question of law for the Assessment Year 1993-1994.

2. QUESTION OF LAW:

“Whether the Tribunal was justified in holding that loans and advances do not include interest on securities, bonds and debentures and, therefore, not liable to tax under the provisions of the interest-tax act when the interest on securities fall within the meaning of “Interest chargeable to tax” as defined under section 2(7) of the Interest-tax Act, 1974. Moreover, requirements of tax deduction at source from interest on securities as per section 193 of the Income-tax Act makes it clear that interest on securities is chargeable to tax under Interest-tax Act, 1974?

FACTS:

3. For the sake of convenience, we are reproducing hereinbelow the facts in Income-tax Appeal No. 71 of 2001.

4. United Western Bank Limited is a Banking Company. The Bank filed its return of chargeable interest on 31-12-1993. The chargeable interest was Rs. 55,35,87,501/-. The chargeable interest was assessed by the AO under the Interest-tax Act, 1974 vide order dated 12-12-1995. Under the said order, the AO made the following additions:

a) Interest on investments and securities — Rs. 25,28,37,893/- b) Incidents on interest tax — Rs. 1,66,07,625/- c) interest on advance/bills — Rs. 5,44,55,558/- Total — Rs. 32,39,01,076/-

5. The AO made the above additions on the ground that the interest on securities was includable in the chargeable interest as defined under section 2(7) of the Interest-tax Act, 1974. Being aggrieved, the assessee carried the matter in appeal before CIT (Appeals), Kolhapur. By his order dated 23-8-1996, CIT (Appeals) came to the conclusion that the interest-tax act was introduced on 23-9-1974. That, in 1974, interest on securities was expressly excluded from the definition of “Interest” under section 2(7) of the Interest-tax Act. However, after 1-10-1991, that exclusion was deleted and, therefore, the Parliament intended to tax interest on securities under section 2(7) of the Interest-tax Act read with section 4 of the Act, 1974. Therefore, the appeal filed by the assessee was rejected. Being aggrieved, the assessee carried the matter to the Tribunal which took the view that in view of the judgment of the Madras High Court in the case of C.I.T v. Lakshmi Vilas Bank Ltd. reported in 228 ITR 697, interest on securities/debentures was not includable under section 2(7) of the Interest-tax Act. Consequently, the Tribunal allowed the appeal. Being aggrieved, the Department has come by way of appeal under section 260-A of the Act read with section 24 of the interest-tax act.

ARGUMENTS:

6. Mr. R.V Desai, learned senior counsel appearing on behalf of the Department, contended that the interest-tax act came into force with effect from 23-9-1974. That, the Act continued to remain in force upto 31-3-1978. That, from 1-4-1978 to 30-6-1980, it was dropped. It was once again revived from 1-7-1980 upto 31-3-1985. From 1-4-1985 upto 30-9-1991, it was once again dropped. On 1-10-1991, it was once again revived and the Act continued to remain in force upto 31-3-2000. After 1-4-2000, it was once again dropped. Mr. Desai further contended that prior to 1-10-1991, the word “Interest” in section 2(7) of the Act excluded by an express provision “interest on securities”. However, after 1-10-1991, when the Act was reintroduced the Legislature deleted the exclusionary clause from section 2(7) which indicated the intention of the Legislature to tax interest on securities. He contended that because the Legislature intended to tax interest on securities, the exclusionary clause was deleted and, thereby interest on securities came within the ambit of the expression “Interest on loans and advances” in the main section 2(7). He contended that for the purposes of this Act, there is no difference between investments and loans. He contended that when the Bank subscribes to the Government Securities, it gives a loan to the Government although in the Balance Sheet, it is shown as Investments. He, therefore, submits that Interest received by the Banks on securities and bonds was taxable under the Interest-tax Act, 1974.

7. Mr. Inamdar, learned counsel appearing on behalf of the assessee-banks contended that the assessee was a Bank governed by the provisions of the Banking Regulation Act, 1949. That, under section 29 of the Banking Regulation Act, the assessee was bound to maintain its Accounts and Balance Sheet in the Forms prescribed in the Schedule III to that Act. He invited our attention to Form A - Schedule III. In the column of “Assets”, Item No. 4 refers to Investments whereas Item No. 6 refers to Advances. He, therefore, submitted that under the Banking Regulation Act, there was a difference between Investments on the one hand and Loans and Advances on the other hand. He submitted that the securities/bonds were not held by the banks as stock-in-trade/current assets. He invited our attention to the Annual Report of the assessee-bank for the Accounting Year 1993-1994 and pointed out Schedule 8 of the Balance Sheet under the caption “Investments in Government Securities; Other Approved Securities; Shares; Debentures and Bonds and Others (including deposits with IDBI, deposits with Post Office and Units of UTI)”. He also invited our attention to Schedule 9 of the Balance Sheet under the caption “Advances”. He submitted that under the Banking Regulation Act, therefore, the assessee-bank was bound to follow Schedule III, which makes the difference between Investments and Advances. Consequently, the assessee-bank has also bifurcated the two items under Schedules 8 and 9 of the Balance Sheet as Investments and Advances. He, therefore, submitted that Loans and Advances under section 2(7) of the Interest-tax Act is different and distinct from Investments made by the assessee-bank. Therefore, section 2(7) covers only Interest on Loans and Advances and not Interest on Investments. He also invited our attention to section 6 of the Banking Regulation Act, which refers to Forms of Business in which banking companies may engage. He submitted that under section 6(1)(a), banks can engage in borrowing; lending or advancing of money either with or without securities. He, therefore, submitted that Lending was an activity permitted by section 6(1) of the Banking Regulation Act which was distinct and separate from Investments. He further submitted that the object of the interest-tax act was to impose Special Tax on Interest earned by Banks and Credit Institutions in order to discourage borrowings by making the borrowings costlier. He relied upon the judgment of the Division Bench of this Court to which one of us was a party, in the case of UTI v. P.K Unni reported in 249 ITR 612 in which this Court has discussed the object of the Act as also the Scheme of the Act. He contended that the Act contemplates two-fold object viz. to augment the revenues and to reduce the borrowings. He contended that the Act was introduced and dropped from time to time depending on the state of economy of the country. That, the Act contemplates anti-inflationary enactment. He contended that under section 26-C, the Lending Credit Institution was entitled to vary the terms of the Loan Agreements so that it could pass the burden of Interest-tax on to the borrower. He contended that section 26-C itself shows that the Act applies only to Loan Agreements and not to Investments. That, the terms of Investments cannot be modified intermittently. That, section 26 gives power to the Lender to modify the terms of the Loan Agreements to pass the burden on to the Borrower. He submitted that if one reads the main section 2(7) of the Interest-tax Act, it is clear that it applies only to interest earned/received on Loans and Advances and, therefore, the exclusionary clause which existed prior to 1-10-1991 was only introduced by the Parliament out of abundant caution and subsequent deletion of this clause would have no effect on the main section 2(7).

FINDINGS:

8. In the case of CIT v. Madurai Mills Co. Ltd. reported in 89 ITR 45, one of the questions which arose for determination revolved around interpretation of section 12-B(1) of the Income-tax Act, 1922. The question was whether on liquidation, distribution of assets amounted to transaction of transfer so as to attract section 12-B of the Act. It was held by the Supreme Court that section 12-B(1) dealt with distribution of assets of the Company in liquidation and on liquidation such distribution did not amount to transfer. However, it was argued on behalf of the Department as in the present case that prior to Finance (No. 3) Act of 1956, there was a proviso to section 12-B(1) under which distribution of capital assets on liquidation of a Company was expressly excluded from transfer but, by reason of Finance (No. 3) Act of 1956 that exclusionary clause was deleted and, therefore, the Legislature wanted distribution of capital assets on liquidation of the Company to be treated as transfer. It was rejected by the Supreme Court. It was held that the exclusionary clause was in the nature of clarification and, therefore, its deletion did not affect the main section 12-B(1). That, the proviso was only introduced by the Parliament by way of abundant caution. In our view, the judgment of the Supreme Court in Madurai Mills' case (supra) applies to this case. In our case also, the main section 2(7) of the Interest-tax Act shows that the word “Interest” meant Interest on Loans and Advances and not Interest on Securities/Debentures and, therefore, deletion of exclusionary clause by Finance (No. 2) Act, 1991 had no consequence on the main section 2(7). Therefore, the exclusionary clause which existed prior to 1-10-1991 was only clarificatory in nature. It was introduced out of abundant caution. It's deletion had no effect on section 2(7).

9. As stated in our judgment in the case of UTI v. P.K Unni (supra), interest-tax act was enacted as an anti-inflationary measure and also to augment revenues. The Act has been brought into force in 1974 and, thereafter, it was intermittently dropped and revived. The Act was meant to discourage borrowings. Between the period 1974 to 1992 interest rates in India were centrally administered. However, after 1992, interest rates are decided by market forces. Even the Government was required to borrow at market rates. After 1992-1993, Government is the biggest borrower. Therefore, the interest-tax act is in force intermittently. Under section 26-C of the Interest-tax Act, the Lender is empowered to modify the terms of the Loan Agreement so as to pass the burden on to the Borrower which itself shows that the Act applies strictly to Loans and Advances and not to investments. section 26-C also indicates that interest-tax act is a Special Tax. That, it provides for an indirect levy on the Borrowers. That, if the argument of the Department was to be accepted, the object of the Act would fail because whenever the bank subscribes to Government Securities, the Borrower is the Government and if the Act is applicable, under section 26-C the Lender would insist on the Government paying Interest-tax which would not only defeat anti-inflationary measure but, it would also decrease the Government revenues. Therefore, one has to keep in mind the object and the scheme of the Act while interpreting section 26-C of the Interest-tax Act. The difference between Loan and Investments is well known in commercial sense, accounting sense and also under the Companies Act (see sections 370 and 372). It is also borne out by section 13(1)(d) and section 11(5) of the Income-tax Act, it is also borne out by section 2(28-A) of the Income-tax Act and section 2(7) of the Interest-tax Act. Therefore, we hold that the interest-tax act will not apply to interest received by the assessee-bank on Securities/Debentures held by the assessee under the category ‘Permanent’.

10. We are confining this judgment to the case of assessee-banks governed by the Banking Regulation Act, 1949. Under the Companies Act also the Form of Balance Sheet is prescribed. In that Form., on the asset side, we have a column under the caption “Current Assets”. We do not have such a column of “Current Assets” under the Banking Regulation Act. Under the Banking Regulation Act, on the asset side, we have “Investments” and “Advances”. However, we do not agree with the contention of the assessee that banks do not hold securities as stock-in-trade. In the Annual Report submitted by the United Western Bank Limited for the Accounting Year 1993-1994 - Schedule 17 deals with “Notes Forming Part of the Accounts” in which it has been clarified under the caption “investments” that the bank holds Investments in Government and other Approved Securities under two categories viz. “Permanent” and “Current”. Therefore, we are confining our judgment only to Investments under the category “Permanent”. We do not wish to express our opinion on securities/debentures held under the caption “Current”.

11. Subject to above, we answer the above question in the Affirmative i.e in favour of the assessee and against the Department. Accordingly, Appeals are dismissed with no order as to costs.

Question answered in favour of assessee.