The Judgment of the Court was delivered by
K.A Thanikkachalam, J.:— Pursuant to the direction given by this court in T.C.P No. 364 of 1981, dated April 19, 1982, the Tribunal referred the following two questions for the opinion of this court, under section 256(2) of the Income-Tax Act, 1961 (hereinafter referred to as the “Act”):
“1. Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 2(7) of the Interest-tax Act, 1974, the Appellate Tribunal was correct in holding that the interest on debentures cannot be treated as interest on loans and advances and that, therefore, it is outside the purview of the Interest-tax Act, 1974?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the debentures issued by the co-operative bank could be regarded as one issued by a company established under a State or Provincial Act and, therefore, the interest is assessable under interest on securities, which is outside the purview of interest for levy of interest-tax under the Interest-tax Act, 1974?
2. In the return filed for the assessment year 1975-76, the interest received on debentures from the land mortgage bank was not included. It was contended that the debentures are neither loans nor advances and they are only an investment. This contention was not accepted by the Inspecting Assistant Commissioner. Under section 2(7) of the Interest-tax Act, interest includes all the interest on loans and advances, but it does not include any interest, chargeable to income-tax under the head “Interest on securities”. It cannot be said that the debentures are not loans as contended by the assessee. According to the Inspecting Assistant Commissioner, it is only interest on money loaned or advanced by the assessee. The security for the loan may be the debentures, but it is nothing but a loan or advance. Even a Government security is only a loan. This would be evident from the fact that the interest on Government securities is specifically excluded from the definition of interest in the Interest-tax Act. But for this exemption the interest on securities would also be included in the interest under the Interest-tax Act. Therefore, it will be seen that except for this specific exclusion, the interest on securities is also considered only as interest on loans. Therefore, according to the Inspecting Assistant Commissioner, it is not possible to accept that interest on debentures is not interest on loans and advances. He further held that the interest on debentures is not assessable under the head “Interest on securities” under the Income-Tax Act, in view of the provisions of section 18 of the Act. Under section 18 of the Act, interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act only is includible under that head. The co-operative land mortgage bank does not come under any of the categories. Therefore, the interest received on debentures of the co-operative land mortgage bank is includible as chargeable interest. As per the statement filed, such interest received from August 1, 1974, to December 31, 1974, was stated to be Rs. 1,14,112. Therefore, this interest amount is includible. On appeal, the first appellate authority confirmed the view taken by the Inspecting Assistant Commissioner. Aggrieved, the assessee filed a second appeal before the Tribunal. The Tribunal found that the amount received as interest from debentures issued by the cooperative land mortgage bank cannot be considered as interest on loans and advances, because debentures are usually classified as investments in any standard book of accountancy. The position is the same even if the balance-sheet prescribed under section 29 of the Banking Regulation Act (sic). It is also classified as investment in the assessee's own balance-sheet. There was, therefore, absolutely no ground for holding that the said income is not income from investment, but interest from loans and advances as assumed by the Inspecting Assistant Commissioner and the first appellate authority.
3. The Tribunal also alternatively found that even if such interest is to be treated as interest on loans and advances, it will be exempt under the definition, because interest on such debentures have to be treated as “interest on securities”, assessable as such under the Income-Tax Act and that such interest on securities is excluded from the purview of the definition of interest for the purposes of the Interest-tax Act. It was found that interest on debentures issued by co-operative societies including a cooperative land mortgage bank specifically comes under section 193 for purposes of deduction of tax from interest on securities as per clause (iib) of section 193 of the Income-Tax Act. It could also be treated as issued by a corporation established under a State Act within the meaning of section 18(1)(ii) of the Income-Tax Act. Since a co-operative society is a corporation with common seal and perpetual succession and since company debenture interest is specifically excluded as per the Objects and Reasons annexed to the Interest-tax Act, 1974, and the Finance Minister's speech introducing the legislation, the debentures issued by co-operative societies being of the same kind as debentures issued by companies, could not have been intended to be brought within the purview of the Interest-tax Act.
4. Before us, learned standing counsel appearing for the Department submitted that the interest paid by the co-operative land mortgage bank on the debentures issued by it in favour of the assessee-bank is on the amount advanced by the assessee-bank by way of loan. Therefore, the interest received cannot be considered as one accrued on the investment made by the assessee-bank while purchasing the debentures issued by the co-operative land mortgage bank. According to learned standing counsel, a debenture is nothing but a document acknowledging a debt. Therefore, the relationship between the debenture holder and the co-operative bank, which issued the debenture, is only that of debtor and creditor. The debenture is nothing but a loan. In order to support this line of contention, reliance was placed upon the meaning attributable to the term “debenture” occurring in P. Ramanatha Aiyar's Law Lexicon at page 290. Reliance was also placed upon the decision of the Supreme Court in Narendra Kumar Maheshwari v. Union of India, 1990 Supp SCC 440 : AIR 1989 SC 2138. Support was also drawn from the decisions in India Cements Ltd. v. Commissioner Of Income Tax, Madras. [1966] 60 ITR 52 (SC) and Director-General of Investigation and Registration v. Deepak Fertilizers and Petro Chemicals Corporation Ltd. [1994] 81 Comp Cas 342 (MRTPC) [FB], Further, according to learned standing counsel, the fact that the assessee has shown purchase of debentures under the head “Investment” as per the provisions of the Banking Regulation Act in the balance-sheet would not in any way alter the character of the interest on debentures to that of interest on investment. It was further submitted that the interest on debentures in the present case is in the nature of interest on loan falling under the main provision of the definition of “interest” contained in section 2(7) of the Interest-tax Act, 1974. According to learned standing counsel, the nature of the transaction has got to be decided in accordance with the facts arising in each case. For this proposition, reliance was placed upon the decision in Delhi Stock Exchange Association Ltd. v. CIT [1961] 41 ITR 495 (SC). In order to elucidate the meaning of the word “debenture”, reliance was placed upon the meaning given in William, Pickles on Accountancy. According to learned standing counsel, debentures are not goods, but only an actionable claim. Therefore, by purchasing the debenture, no property is acquired. It was further submitted that the circular issued by the Central Board of Direct Taxes (Circular No. 665, dated October 5, 1993) reported in [1993] 204 ITR (St.) 39, has no relevance to the issue arising in the present case. Therefore, the interest received by the assessee-bank on the debentures issued by the co-operative land mortgage bank, would be in the nature of interest received on loans and advances. By no stretch of imagination, can the purchase of debentures be called an investment Therefore, according to learned standing counsel, the Tribunal was not correct in holding that interest received by the assessee on the debentures purchased by it from the co-operative land mortgage bank would amount to interest on investment.
5. In the matter of considering whether the interest received on debentures would amount to interest on securities, learned standing counsel for the Department submitted that all interest would prima facie fall to be assessed under the Interest-tax Act unless it is specifically exempt under the definition under section 2(7) of the Interest-tax Act. One of the two exemptions under the definition is that the amount chargeable as interest on securities under the Income-Tax Act will not be included for purposes of the Interest-tax Act. According to learned standing counsel, the interest from debentures issued by the co-operative land mortgage bank cannot be assessed under section 18 as interest on securities, but only as interest assessable under other sources. While referring to section 18 of the Income-Tax Act, learned standing counsel submitted that debentures issued by the co-operative land mortgage bank under the Co-operative Societies Act cannot be considered to be debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act. In this context, learned standing counsel submitted that the Tribunal was not correct in holding that the co-operative society registered under the Co-operative Societies Act should be treated as a corporate body. Relying upon a passage occurring at page 39 under the heading “proviso” in Sampath Iyengar's Law of Income-Tax, learned standing counsel submitted that the second proviso to section 193 cannot control section 18(2), since section 18 is unambiguous and accordingly the debenture issued would not come under its purview. Therefore, according to learned standing counsel, the contention put forward by the assessee that since the interest received on the debentures was assessed under the head “Interest on securities” under section 18 of the Income-Tax Act, it cannot again be taxed under the Interest-tax Act cannot be accepted. For these reasons, learned standing counsel for the Department submitted that the Tribunal was not correct in holding that the interest on debentures is interest on “investment”, as otherwise it was taxable as interest on securities and, therefore, the interest received on debentures is not taxable under the Interest-tax Act.
6. On the other hand, learned counsel appearing for the assessee, while supporting the order passed by the Tribunal, submitted that the interest on debentures received by the assessee is interest on investment and, therefore, it cannot come under the purview of section 2(7) of the Interest-tax Act. “Interest” is defined under section 2(7) of the Interest-tax Act as 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) any amount chargeable to income-tax under the Income-Tax Act, under the head “Interest on securities”, and (ii) discount on treasury bills. Therefore, according to learned counsel appearing for the assessee, interest on debentures is not interest on loans and advances. Debentures represent an investment of the bank and they do not partake of the character of loans and advances. They have to be shown under the head “Investment” in the balance-sheet under the Banking Regulation Act. They are only trusteeship securities and have also been approved and recognised for the purpose of section 24 of the Banking Regulation Act. They are neither debts nor advances and, therefore, the interest received thereon is not exigible to tax under the Interest-tax Act. Consequently, interest on debentures of the co-operative land mortgage bank is assessable under the head “Interest on securities” and since there is a prohibition in the section against inclusion of such interest in the “chargeable interest”, the same should not be taxed. Attention was invited to section 193 of the Income-Tax Act, which provides for deduction of tax at source from interest on securities. This section provides that a person responsible for paying any income chargeable under the head “Interest on securities” shall, at the time of payment, deduct income-tax on the amount of interest payable. There is a proviso to the section under clause (iib) which excludes any interest payable on debentures issued by any co-operative society, including a co-operative land mortgage bank or a co-operative land development bank, or any other institution or authority, as the Central Government may, by notification in the Official Gazette, specify in this behalf from the operation of the section. It was, therefore, submitted that the co-operative land mortgage bank's debentures should have been recognised as securities or else exclusion of interest payable on such debentures from the operation of section 193, would not have been specifically mentioned under the section. Consequently, it was submitted that interest on these securities was assessable under the head “Interest on securities” and, therefore, such interest has to be excluded from the purview of the Interest-tax Act under section 2(7)(b)(i). According to learned counsel appearing for the assessee, a co-operative land mortgage bank is an institution established under a State or a Provincial Act, viz., the Co-operative Societies Act, and, therefore, any interest payable on the debentures issued by the State will fall to be assessed under section 18(1)(ii) as interest on securities. Therefore, interest on such debentures has to be excluded under section 2(7)(b)(i). According to learned counsel appearing for the assessee the assessee-bank is compelled to make investment of certain percentage in the approved securities and direction was given under the Banking Regulation Act to show such investments under the head “Investments” in the balance-sheet. Therefore, of necessity, the assessee-bank invested in debentures issued by the co-operative land mortgage bank. Therefore, from the point of view of the assessee, purchasing the debentures would amount to investing the amount in approved securities. The speech made by the Finance Minister in Parliament while introducing this Bill and the preamble to the Interest-tax Act would go to show that the Government is intending, while discouraging the taking of loans from the commercial banks, to levy tax on the interest received by the scheduled bank including debentures and other securities issued by local authorities, companies and statutory corporations, will not be included in the tax base (sic). Therefore, according to learned counsel appearing for the assessee from the point of view of the assessee, purchase of debentures would amount to investing the amount in approved securities. Learned counsel appearing for the assessee also relied upon the circular issued by the Central Board of Direct Taxes (Circular No. 665 (see [1993] 204 ITR (St.) 39)), dated 5th October, 1993) in order to show that amounts invested in purchasing the debentures would also amount to investment made in approved securities. However, according to learned standing counsel for the Department what is stated in paragraph 4 of the said circular is concerned with a question, whether a particular item of investment in securities constitutes stock-in-trade or a capital asset. This is a question of fact. This has got to be decided on the basis of facts arising in each case. Therefore, according to learned standing counsel, this circular has no relevance for the present case.
7. We have heard learned standing counsel appearing for the Department as well as learned counsel appearing for the assessee. In the assessment year 1975-76, the assessee had received a sum of Rs. 1,14,112 as interest on debentures of the co-operative land mortgage bank for the period from August 1, 1974, to December 31, 1974, relevant for the assessment year 1975-76. This amount was not included in “chargeable interest” offered for assessment on the ground that the debentures were neither a loan nor an advance and they represented investments of the bank, the return from which did not come within the scope of the definition of “interest” under section 2(7) of the Interest-tax Act. However, this was not accepted by the Department and it included the same in “chargeable interest”. According to the Department under section 2(7)(b)(i) only interest chargeable under the Income-Tax Act under the head “Interest on securities” has been exempted from the scope of “interest” under the definition and as interest on the debentures of the co-operative land mortgage bank is not chargeable under the head “Interest on securities” under section 18 of the Income-Tax Act, the same was includible in the chargeable interest under the Interest-tax Act.
8. The Department was also of the view that under the definition of “interest”, only those items of interest which are specifically excluded from its scope are to be left out. The debentures of the land mortgage bank are not securities of the Central or State Government which is a necessary condition for the assessment of the interest received therefrom under the head “Interest on securities” under section 18 of the Income-Tax Act. The Department was also of the view that the debentures of the land mortgage bank cannot also be regarded as securities issued by or on behalf of a local authority, or a company or a corporation established by a Central, State or a Provincial Act, which is also a necessary requirement for the assessment of interest received thereon under the head “Interest on securities” under section 18 of the Income-Tax Act. All loans and advances represented investment of the bank and on that ground alone interest received on debentures, which is also a form of loan or advance, cannot be exempted unless there is a specific provision in the Act to exclude the same from the purview of the Act. According to the Department, it is only because interest on Government securities would come to be regarded as interest chargeable, that a provision has been made for exclusion of interest on Government securities, which are assessable under the head “Interest on securities”. But for this exclusion, interest on securities would also represent an item of interest chargeable under the Interest-tax Act.
9. Section 4 of the Interest-tax Act is the charging section, which levies tax on “chargeable interest” of the previous year. Chargeable interest is defined under section 2(5) of the Interest-tax Act to mean the total amount of interest referred to in section 5. Section 5 refers to the total amount of interest, other than interest on loans and advances made to scheduled banks, accruing or arising to the bank in that previous year. Section 2(7) defines “interest” as interest on loans and advances made in India. Under section 2(7)(b)(i) any amount chargeable to income-tax, under the Income-Tax Act, under the head “Interest on securities” would not be included as interest under the Interest-tax Act. According to the Tribunal, section 2(7) states that interest means interest on loans and advances made in India and since the word used is “means”, it cannot be said to be not an exhaustive definition. It also includes commitment charges and discount. It is not the case of the Department that interest on debentures is either commitment charges or discount.
10. Therefore, the first point for consideration is whether interest on loans and advances would include interest on debentures of the land mortgage bank. According to the Tribunal, debentures are generally classified as investments in any balance-sheet in accordance with the standard text books on accountancy. It was pointed out that the balance-sheet of a banking company has to be in the form prescribed under section 29 of the Banking Regulation Act. Such form appears in the Third Schedule. In the Schedule debentures appear under investments. In the balance-sheet pertaining to the assessment year under consideration, the assessee classified debentures under investment. Debentures were not mentioned under the head “Loans and advances” which are separately shown in the balance-sheet. Therefore, as per the accountancy principles and as per the provisions of the Banking Regulation Act, debentures are not loans according to the Tribunal. It is the case of the Department that while ascertaining the nature of the debentures, we should look into the Income-Tax Act and the Interest-tax Act and there is no necessity to see the Banking Regulation Act to find out how the interest received on debentures is chargeable. According to the Department, a debenture is nothing but an acknowledgment of a debt and the relationship between the debenture holder and the co-operative land mortgage bank which issued the debenture is that of creditor and debtor.
11. In the Law Lexicon at page 290 by P. Ramanatha Aiyar a “debenture” is a document or a certificate signed by the officer of a corporation or company acknowledging indebtedness for money lent and guaranteeing repayment with interest; a security for a loan of money issued by a public company, usually creating a charge on the whole or a part of the company's stock and property, though not necessarily in the form of a mortgage. Section 137 of the Transfer of Property Act regards debentures as the subject-matter of a transfer and not as constituting a transfer by itself. A debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a debenture. Although the instruments called debentures may be described with comparative ease, a judicial definition of a debenture—or at any rate an accurate one—has not been obtained and is perhaps not urgently required. In the Accountancy Text Book by William Pickles, “debenture” is defined as a document, acknowledging a loan to a company and is generally executed under the seal of the company, usually (but not necessarily) containing provisions as to payment of interest and the repayment of the principal and giving a charge on the assets of such company, and may give security for the payment over some or all of the debts and undertakings of the company.
12. In Halsbury's Laws of England, 4th edition, 7th volume, in paragraph 813, the meaning of “debenture” is stated as under:
“No precise definition of the word ‘debenture’ can be found, but various forms of instruments are called debentures. A debenture is a document which either creates or acknowledges a debt. A document may be a debenture although under its terms, the debt is only to be repaid out of a part of the profits. The term ‘debenture’ is usually associated with a company of some kind, and most debentures are securities given by companies, but they are often granted by clubs and occasionally by individuals.”
13. In Narendra Kumar Maheshwari v. Union of India, 1990 Supp SCC 440 : AIR 1989 SC 2138, 2178, it has been held that a “debenture” has been defined to mean essentially an acknowledgment of a debt with a commitment to repay the principal with interest. In India Cements Ltd. v. Commissioner Of Income Tax, Madras. [1966] 60 ITR 52 (SC), at page 61, it was held that obtaining capital by issue of shares is different from obtaining a loan by debentures. A loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee.
14. In Director-General of Investigation and Registration v. Deepak Fertilizers and Petrochemicals Corporation Ltd. [1994] 81 Comp Cas 342 (MRTPC) [FB], it was held that a “debenture” is simply an acknowledgment of debt by the company whereby it undertakes to repay the amount covered by it and till then it undertakes further to pay interest thereon to the debenture holder. Except where debentures are secured by mortgage of immovable property or hypothecation or pledge of movable property, they constitute actionable claims. It was further held that a debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital. Therefore, debentures are not goods within the meaning of section 2(e) of the Monopolies and Restrictive Trade Practices Act.
15. In order to show that in the present case by purchasing the debentures the assessee-bank made an investment, reliance was placed upon the decision in CIT v. Nachimuthu Industrial Association [1982] 138 ITR 585 (Mad), wherein it was held “that in order to constitute an investment, the money must be laid out in such a manner as to acquire some species of property which would bring an income to the investor.”
16. Section 2(12) of the Companies Act defines “debenture” as under:
“‘debenture’ includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.”
17. At page 1366 (sic), “investment” is defined as under:
“The expression means the laying out of money in such a manner that it may produce a revenue, the usual method being the purchase of shares, stocks, securities or other property. All loaning of money at interest is not investment. The loaning must be in the nature of a laying out of money either in the purchasing, acquiring or securing of some interest by way of mortgage or otherwise in property, tangible or intangible or in a business enterprise. A mere lending or deposit of money will not be an investment. It must, in some way, be related to property so as to earn an income for a reasonable length of time.”
18. As per section 29 of the Banking Regulation Act, 1949, after the expiry of two years from the commencement of this Act, every banking company shall maintain (in India) in cash, gold or unencumbered approved securities, valued at a price not exceeding the current market price, an amount which shall not at the close of business on any day be less than 20 per cent, of the total of its (demand and time liabilities) in India.
19. Paragraph 4 of the Board's Circular No. 665 (see [1993] 204 ITR (St.) 39), dated October 5, 1993, is concerned with whether a particular item of investment in securities constitutes stock-in-trade or a capital asset is a question of fact. Therefore, the Board directed the assessing authorities to determine on the facts and circumstances of each case as to whether any particular security constitutes stock-in-trade or investment taking into account the guidelines issued by the Reserve Bank of India in this regard from time to time. According to the Department, the Board's circular has no relevance to the issue arising in this case.
20. In Delhi Stock Exchange Association Ltd. v. CIT [1961] 41 ITR 495, the Supreme Court held “that it was not how the assessee treated any moneys received, but what was the nature of the receipts in question that was decisive of their taxability; and, therefore, the fact that the appellant company showed the admission fees as capital in its books was not decisive on the question of their taxability”.
21. We have seen that in Halsbury's Laws of England, it is stated that the term “debenture” is always associated with a company of some kind and most debentures are securities given by companies. Section 2(12) of the Companies Act states that “debenture” includes debenture stock and any other securities of a company whether constituting a charge on the assets of the company or not.
22. If the interest is on loans and advances, then such interest is taxable under the Interest-tax Act. But if the interest received by the assessee on debentures is considered to be received on securities, then such interest would not be liable to be taxed under the Interest-tax Act. From the way in which the assessee-company treated the interest received on debentures as per the provisions of section 29 of the Banking Regulation Act, and showing the same under the head “Investment” and not under the head “Loans and advances” in the balance-sheet, since the assessee is compelled to make a certain percentage in the approved securities in the stated institutions, from the point of view of the assessee, the Tribunal held that the interest on debentures would amount to interest on securities, and, therefore, goes beyond the purview of the provisions of the Interest-tax Act. Therefore, according to the Tribunal, the interest on debentures cannot be considered as interest on loans and advances. In view of the definition given by various authorities with regard to “debenture”, we have to come to the conclusion that the debentures are also in the nature of securities. Under such circumstances, we are accepting the finding given by the Tribunal that interest on debentures is interest on investment. The contention of the Department was that while ascertaining the character of the interest received on debentures, one should consider the Interest-tax Act and not the Banking Regulation Act for charging the interest under the Interest-tax Act. However, according to the assessee, they are bound by the Banking Regulation Act in the matter of maintaining the balance-sheet and in the balance-sheet, as per section 29 of the Banking Regulation Act and in accordance with the Third Schedule therein, the assessee-bank has got to make investments to permissible percentage and enter the same under the head “Investment” even though there are other heads in the balance-sheet like advances and loans, etc. As per the decision reported in Delhi Stock Exchange Association Ltd. v. CIT [1961] 41 ITR 495 (SC), the entries made in the balance-sheet or in the account books by the assessee would not be conclusive in the matter of ascertaining the character of the entries made therein. But we have got to see the facts arising in each case while ascertaining the character of the entries made in the balance-sheet or in the account books. In the present case, the assessee-bank had an obligation to follow the Banking Regulation Act; at the same time, the assessee is also answerable to the Income-Tax Act while submitting his return. The Income-Tax Act did not define “debentures”. To understand the meaning of the word “debentures” we have to depend upon various other enactments as mentioned hereinbefore. Considering those aspects and the fact that the assessee is also obliged to follow the provisions of the Banking Regulation Act, we are of the opinion that the conclusion arrived at by the Tribunal in holding that the interest on debentures is interest on investment, is not in violation of any of the recognised meanings given to the word “debenture” in various other enactments. Further, it also remains to be seen that the Interest-tax Act is applicable only to the interest received by the banks. In such circumstances, placing reliance on the provisions of the Banking Regulation Act in the matter of understanding the meaning of the word “debenture” and in ascertaining the character of the interest received on debentures would not be out of context. Therefore, we find no infirmity in the conclusion arrived at by the Tribunal that interest on debentures cannot be considered as interest on “loans and advances”, liable to be taxed under the Interest-tax Act.
23. Now, what remains to be considered is whether the interest received on debentures would fall under interest on securities within the meaning of section 18 of the Income-Tax Act. It is the case of the Department that all interest received by a bank will come under the Interest-tax Act. It was argued that interest from debentures of the land mortgage banks will not be assessable as interest on securities, and, therefore, will not be eligible for exclusion. We have already held that the interest from debentures cannot be included because it is not interest on loans and advances. The Tribunal was of the view that interest from debentures of the land mort-gage bank, which is registered under the Madras Co-operative Societies Act, will have to be treated as interest falling under interest on securities within the meaning of section 18 of the Income-Tax Act.
24. Section 18 of the Income-Tax Act reads as under:
“Interest on securities. —(1) The following amounts due to an assessee in the previous year shall be chargeable to income-tax under the head ‘Interest on securities’,—
(i) Interest on any security of the Central or State Government (not being interest payable under section 280D in respect of any annuity deposit made under Chapter XXIIA).
(ii) interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act.
(2) Nothing contained in sub-section (1) shall be construed as precluding an assessee from being charged to income-tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income-tax for any earlier previous year.”
25. We have to consider whether debentures issued by a land mortgage bank under the Co-operative Societies Act can be taken to be debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act, within the meaning of sub-clause (ii) of sub-section (1) of section 18 of the Act. It was pointed out that a co-operative society, registered under the Co-operative Societies Act has its own seal and perpetual succession having an identity of its own. Therefore, it has got to be treated as a corporate body. There is also no restrictive definition of corporation in the Income-Tax Act itself. However, no serious thought was bestowed on this aspect, according to the Department, whether registration of the cooperative society under the Co-operative Societies Act can be considered to be equivalent to being established by a Central, State or Provincial Act. According to learned standing counsel, a co-operative society is established not by an enactment made by a Central, State or Provincial Government, but it was created under a statute by a group of individuals. Therefore, a co-operative society is not a statutory corporation. It was pointed out that companies registered under the Co-operative Societies Act cannot be strictly considered to have been established under a statute by any one of the abovesaid authorities. In order to understand what is interest on securities, we have to refer to section 193 of the Income-Tax Act in Chapter XVIIB, under the heading “Interest on securities”. The section reads as under:
“193. Interest on securities.— The person responsible for paying any income chargeable under the head ‘Interest on securities’ shall at the time of payment, deduct income-tax at the rates in force on the amount of the interest payable…
(iib) any interest payable on such debentures, issued by any cooperative society (including a co-operative land mortgage bank or a cooperative land development bank) or any other institution or authority, as the Central Government may, by notification in the Official Gazette, specify in this behalf; or aaaa”
26. According to the Tribunal, when once a company or a co-operative society gets registered, it becomes an institution established under the Act because it is liable to all benefits and obligations the moment it is registered. The Tribunal further pointed out that on the basis of the reasoning given by the assessee, it is not possible to say that even interest from company debentures will go out of the purview of the Interest-tax Act. The Tribunal pointed out that interest from debentures issued by companies will certainly be entitled to be excluded. In order to support the conclusion arrived at by the Tribunal that co-operative societies registered under the Co-operative Societies Act are also corporate bodies, reference was made to the speech made by the Finance Minister, dated July 31, 1974, in Parliament, which is extracted at page 76 of [1974] 95 ITR (St.). In the speech made by the Finance Minister, it was pointed out that the Government propose to levy a tax on the gross amount of interest received by scheduled banks on loans and advances made in India. The proposed tax will have both a monetary and a fiscal impact in that it will serve the purpose both of raising the cost of borrowed funds and of supplementing Government revenues. The debentures and other securities issued by local authorities, companies and statutory corporations will not be included in the tax base. Interest received on transactions between scheduled banks will likewise be exempted from the proposed levy.
27. Support was also drawn from the Statement of Objects and Reasons annexed to the Interest-tax Act, 1974, which is available at page 31 of [1974] 96 ITR (St.). The object of this Bill is to impose a special tax on the total amount of interest received by scheduled banks on loans and advances made in India. However, interest on Government securities as also debentures and other securities issued by local authorities, companies and statutory corporations will not be included in the tax base.
28. This would indicate that interest on company debentures is excluded. According to the Tribunal, if interest on company debentures is to be excluded, why should the interest on debentures issued by the land mortgage bank registered under the Co-operative Societies Act and guaranteed by the State Government and also declared as trusteeship securities for the purpose of the Trusts Act, not be treated in the same manner. In other words, it was pointed out that when interest on debentures issued by companies is excluded from the purview of the Interest-tax Act, on the same reasoning, interest on debentures issued by co-operative societies should also be excluded. However, our attention was drawn to the decision of the Supreme Court in S.S Dhanoa v. Municipal Corporation, Delhi, (1981) 3 SCC 431 : AIR 1981 SC 1395, wherein the Supreme Court held “that a co-operative society is not a statutory body because it is not created by a statute. It is a body created by an act of a group of individuals in accordance with the provisions of a statute. A co-operative society, therefore, is not a corporation established by or under an Act of the Central or State Legislature”. This decision was rendered while considering whether the appellant, who was working in the Municipal Corporation, Delhi, is a Government servant or not. In view of the abovesaid decision of the Supreme Court, it is not possible for us to accept the conclusion arrived at by the Tribunal that the co-operative land mortgage bank is also a corporate body established by the Co-operative Societies Act. It was pointed out that the co-operative land mortgage bank was formed under the Cooperative Societies Act, an enactment made by the Tamil Nadu Government, and the co-operative land mortgage bank was not established by the said Act. Under such circumstances, the conclusion of the Tribunal that interest on debentures issued by the co-operative land mortgage bank would go out of the purview of the Interest-tax Act, placing reliance on the proviso to section 193 and the provisions contained in section 18 of the Income-Tax Act, is not acceptable. Accordingly, we answer question No. 1 referred to us in the affirmative and against the Department. In so far as question No. 2 is concerned, we answer the same in the negative and in favour of the Department. No costs. Counsel's fee is fixed at Rs. 2,000 (rupees two thousand).