Housing & Urban Development Corpn. Ltd. v. Joint Commissioner of Income-tax, Special Range-24

Per B.R. Jain, Accountant Member. - By the powers vested under section 255(3) of the Income-tax Act, 1961, the Hon’ble President, ITAT, constituted Special Bench for answering the agreed question as under :—

"Whether on facts and in the circumstances of the case, the interest earned by the assessee corporation from Investments made by way of short-term deposits with public undertakings and also in the form of securities and bonds etc. can be covered under the definition of ‘Loans & Advances’ chargeable to tax under section 2(7) read with section 5 of the Interest Tax Act."

2. Shri Dwivedi appearing on behalf of the assessee contends that the interest tax is payable on the amount of interest earned on loans and advances only. It does not include interest earned on funds invested in bonds or placed in fixed deposits. Scope of chargeable interest has been defined under section 5 of the Interest Tax Act while sub-section (7) of section 2 of the Act defines interest to mean interest on loans and advances made in India. This definition uses the expression ‘mean’ and ‘includes’ and as such the same is not an extensive definition but is exhaustive in itself. When exhaustive definition is given, then there remains no scope for giving interpretation, implication, presumption, addition or subtraction to what has clearly and exhaustively been mentioned therein. For this proposition reliance was placed on the Supreme Court judgment in Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 wherein the Apex Court has stated the settled principle of law as under :

"In a taxing act one has to look merely as to what is clearly said. There is no room for any intendement. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the languages used."

3. He also placed reliance on the recent decision of Hon’ble Allahabad High Court in the case of CIT v. Sahara India Savings Corpn. Ltd. [2003] 264 ITR 647 and two other judgments in the cases of A.N.Z. Grindlays Bank v. Dy. CIT [2003] 131 Taxman 183 (Delhi)(Mag.) and Punjab National Bank v. Dy. CIT [2003] 87 ITD 11 (Delhi) where it has clearly been held that the interest that falls under the scope of this Act is the interest on the amount of loans and advances only. It was therefore contended that in view of the definition of the word ‘interest’, no other type of interest income except interest on loans and advances can be included in the chargeable interest for the purpose of levy of interest tax.

4. Assessee’s counsel further seeks to state that there is a distinction between the term ‘loans’ and ‘Deposits’ as under :

"(a)Loan is a transaction between lender and borrower under a contract. In case of Deposit the same is made of one’s own volition or freewill.

(b)In the case of loan it is the duty of the debtor to seek out the creditor and repay the money according to the agreement. On the other hand in the case of deposit it is the duty of the debtor to go to the banker or to the depositee and make a demand for it. This distinction was made by the Lahore High Court in the case of Gursharan Das v. Ram Rakhamal AIR 1937 Lahore 81.

(c )Deposit is to be kept by the depositee for the depositor and the loan is to be kept by the borrower for himself.

(d)Section 269T which is applicable to deposit excludes loans from its purview. This has also been upheld by the Delhi High Court in the case of Baidyanath Plastic Industries (P.) Ltd. v. K.L. Anand, ITO [1998] 230 ITR 522 (Delhi)."

5. He further pointed out that section 370 of the Companies Act, 1956 was applicable to loans given to other companies and it was judicially held that the same did not include deposits made to other companies. The section was subsequently amended to include deposits into its ambit but no such amendment has been made in the Interest Tax Act. Reference was also made to the two decisions of the Bombay High Court in Durga Prasad Mandelia v. ROC [1987] 61 Comp. Cas. 479 and Pennwalt India Ltd. v. ROC [1987] 62 Comp. Cas. 112 for the proposition that the deposits are not considered as loans for purposes of section 370 of the Companies Act, 1956.

6. The learned counsel for the assessee further contends that the Limitation Act, 1963 also makes a clear cut distinction between the two expressions. Articles 19 and 21 of the Limitation Act fixes the period within which suits for recovery of loans can be filed while article 22 deals with the period of limitation for suits for money on account of deposit. The starting period of limitation under articles 19 and 21 on the one hand and article 22 on the other are different. Under articles 19 and 21 the cause of action in the case of money lent arises from the date of loan, whereas under article 22 the cause of action in the case of a deposit arises from the date of demand. Therefore, the deposit is clearly distinguishable from the loan. Reliance was also placed on various case laws as under :

1.Ram Janki Devi v. Juggilal Kamlapat AIR 1971 SC 2551

2.Ram Ratan Gupta v. Director of Enforcement, Foreign Exchange Regulation AIR 1966 SC 495

3.Abdul Hamid Sahib v. Rahmat Bi AIR 1965 Mad. 427

4.Sharda Talkies (Firm) v. Smt. Madhulata Vyas AIR 1996 MP 68.

It was therefore contended that in that view of the matter interest earned on deposits and securities bonds would fall out side the scope and ambit of chargeable interest under this Act.

7. Shri Diwedi also states that if the Tribunal is of the view that two interpretations are possible, then also the possible interpretation which reads favourable to the assessee has to be given a precedence over the other view. Reliance was placed to the judgment of the Hon’ble Delhi High Court in the case of CIT v. Nestle India Ltd. [2005] 275 ITR 1¹ and also decision of Tribunal in a Third Member case in Saipem S.P.A. v. Dy. CIT [2005] 276 ITR (AT) 55 (Delhi).

8. On the other hand Shri Rajnish Kumar, the Ld. CIT-DR appearing for revenue contends that perusal of definition of interest contained under section 2(7) of the Act would reveal that it excludes two items, namely, interest as referred under section 42(1B) of the RBI Act, 1934 and (ii) discount on treasury bill, from the scope of definition of interest. Thus the definition of interest has an exclusion clause. Accordingly, except these two items, nothing else can be excluded from the scope and ambit of interest that can be subjected to tax under the Interest Tax Act. The word ‘interest’, therefore, has to be given its natural meaning and this would include every thing in its scope which can be lebelled as an interest. The provisions of sections 370 and 295 of the Companies Act as referred by the assessee’s counsel with respect to loans and advances also support the case of revenue in view of the fact that the expression ‘loan’ was amended to include the amount of deposit as well. The Ld. DR further seeks to draw attention of the Bench to the expression used in sub-section (7) of section 2 of the Act is ‘loans and advances’. The assessee’s counsel however, has sought to rely upon the judgments of various Courts which have considered the definition of ‘loan’ and ‘deposit’. No precedence has been brought to the notice of the Tribunal to show that there is a distinction between the ‘loans and advances’ and ‘deposit’. The word ‘advances’ used in the expression ‘loans and advances’ has also to be considered since the same will take into account of deposit because of the exclusionary definition. The assessee’s reliance on the decision of jurisdictional High Court in the case of Baidya Nath Plastic Industries (P.) Ltd. v. K.L. Anand, ITO [1998] 230 ITR 522 (Delhi) will also not be of much assistance as that was a judgment with respect to repayment of loans. It did not have any relation with respect to advancing of loans on which interest earned can be said to have any implication for the purpose of its assessability under this Act. It was also stated that the Tribunal decision in the case of Punjab National Bank (supra) strongly relied by the assessee’s counsel to state that it will not be legally acceptable to include interest on securities, bonds and debentures within the definition of interest under section 2(7) of the Act, cannot be taken a basis for arriving at the conclusion on the question under reference inasmuch as that order was rendered by the Division Bench by following the majority view of the co-ordinate benches of the Tribunal. This fact is borne out from para 71 of that order. Likewise the decision rendered by the Bombay Bench of the Tribunal in the case of LIC v. Jt. CIT [2002] 82 ITD 749 will also be of no help to the issue under consideration as that was the decision rendered in the case of a statutory corporation. The Ld. DR, therefore, seeks to rely on the decision of Hyderabad Bench of the Tribunal in the case of State Bank Of Hyderabad v. Commissioner Of Income-Tax. [1998] 66 ITD 464 . The Division Bench of the Tribunal in that decision took note of the intention of the Parliament while introducing the Act for arriving at the conclusion that the interest even on securities and investment shall be chargeable for the purpose of collecting tax under this Act. The relevant extract referred is reproduced here under :

"We have considered the submissions advanced before us. It is true that when the Interest Tax Act was introduced in Parliament the intention was that 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. This is clear from a reading of the statement of objects and reasons of the Act. It appears that due to this intention any amount chargeable to income-tax under the Income-tax Act, under the head ‘Interest on securities’ was specifically excluded for the purposes of the term ‘interest’ as defined in section 2(7) of the Act. However, with effect from 1-10-1991 section 2(7) has been substituted and, therefore, the provision as contained the original section cannot come to the rescue of the assessee, nor can the Statement of Objects and Reasons, as given at the title of introduction of the bill be of any assistance in the matter. The fact that the exclusionary clause has been deleted with effect from 1-10-1991 is a sufficient indication that interest as securities has now been included in the tax base. This belief is strengthened from the Notification issued by the Central Government by exercise of the powers under section 28, which has already been referred to earlier."

It was, therefore, contended that the interest earned on short-term deposit with Public Sector Undertaking and also from securities and bonds is covered under definition of loans and advances chargeable to tax under section 2(7) of the Act read with section 5 of the Interest Tax Act.

9. We have heard the parties with reference to precedents on record. The issue under reference relates to the taxability of interest earned under the Interest Tax Act (in short ‘the Act’). This Act was originally introduced in 1974 to tax the interest earnings of Scheduled Banks. By the Finance Act, 1978 applicability of the Act was withdrawn. Later on by Finance Act (No. 2) 1980 the Act was made applicable to Schedule Banks and IDBI, IFCI, IRCI and ICICI. It was again withdrawn by Finance Act, 1985. By the Finance (No. 2) Act, 1991, the Act was reintroduced with effect from 1-10-1991. Again the same has been withdrawn by the Finance Act, 2000, with effect from 1-4-2001. Issue under reference however relates to the Act as applicable between the period 1-10-1991 to 31-3-2001. When the Act was reintroduced by Finance Act, 1991, some changes were made. The scope of the applicability of the Act was widened by extending its applicability to all other non-banking financial companies and State Financial Institutions besides Banks and public financial institutions. The definition of the word ‘interest’ was also modified.

10. In the Scheme of the Act, section 5 of the Act defines the scope of chargeable interest to mean the total amount of interest of a credit institution other than interest on loans & advances to other credit institutions and co-operative society engaged in carrying banking business. Section 4 is the charging section and provides the charge on ‘chargeable interest’ of the credit institution and the rate of such levy. Section 6 provides the computation of the chargeable interest to mean the total chargeable amount of interest as reduced by the amount of chargeable interest, which has become bad. Section 2(5) defines ‘chargeable interest’ to mean the total amount of interest as referred in section 5 and computed in the manner provided in section 6. Section 2(5A) defines credit Institution i.e., Banking Companies, Public Financial Institutions, State Financial Institutions and other financial companies viz. hire purchase company, Investment companies, housing finance companies, loan companies, mutual benefit finance companies, residuary finance companies and miscellaneous finance companies. Section 2(7) defines ‘interest’. Since the meaning of this word is core to the issue under reference before us, sub-section (7) of section 2 is reproduced as below :—

Prior to its amendment in 1991

"(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 )any amount chargeable to income-tax, under the Income-tax Act, under the head ‘Interest on securities’

(ii)interest referred to in sub-section (1B) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934);

(iii)discount on treasury bills;"

After this amendment in 1991 with effect from 1-10-1991

"(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 the Reserve Bank of India Act, 1934 (2 of 1934);

(ii)discount on treasury bills;"

11. The definition of ‘interest’ as contained in section 2(7) thus has three limbs :—

(a)It defines Interest to mean interest on loans & advances made in India, and

(b)Besides (a) above, it specifically includes two other items within the meaning of interest i.e.

(i)Commitment charges

(ii)discount on promissory notes and bills of exchange

(c)It specifically excludes two items from the meaning of the word ‘interest’

(i)interest referred to in sub-section (1B) of section 42 of RBI Act

(ii)discount on treasury bills

12. The definition of ‘interest’ as appeared prior to its amendment did not include the amount chargeable to income-tax, under the Income-tax Act, under the head ‘Interest on securities’ but this specific exclusion does not find any place in the amended definition applicable from 1-10-1991. A close examination of this clause would reveal that it does not merely talk of ‘Interest on securities’ but also speaks about any amount chargeable to income-tax under the Income-tax Act, under the head ‘Interest on securities’. The Finance Act, 1988 with effect from 1-4-1989 omitted sections 18 to 21 from the Income-tax Act. Thus there is no income left to be charged under that head. As such, the above clause has become redundant. The omission of this clause from the definition of interest under this Act, was thus to bring the provisions of ‘the Act’ in conformity with the Income-tax Act. If the intention of law makers was to tax such interest, the same could very well have been included in the second part of the definition, which speaks of the items to be included in the definition of interest. We, therefore, are unable to subscribe to the view canvassed by revenue on the basis of Tribunal decision of Hydrabad Bench that interest on securities after the amendment is not exempt from tax. However, the ld. Counsel rightly points out that the words ‘means’ ‘includes’ and ‘but does not include’ used in section 2(7) in the definition clause of the word ‘interest’ give exhaustive definition and not extensive definition of that expression. The Hon’ble Allahabad High Court in the case of Sahara India Savings Corpn. Ltd. (supra) have explained the meaning of these words at page 652 of the report as under :—

"The new definition of the word ‘interest’ in section 2(7) is in two parts. Firstly, it says that ‘interest’ means interest on loans and advances. Secondly, it includes two other items in the definition of the word ‘interest’.

In our opinion, the only correct interpretation of this provision can be that firstly nothing is interest except interest on loans and advances. Secondly, two other categories are also included in the definition of the word ‘interest’ as specified in clauses (a) and (b) of section 2(7). In our opinion, the word ‘means’ can only have one meaning, that is, it is an exclusive definition vide P. Kasilingam v. P.S.G. Collge of Technology [1995] Supp. 2 SCC 348. When we say that a word has a certain meaning then by implication we mean that it has no other meaning vide Punjab Land Development & Reclamation Corpn. Ltd. v. Presiding Officer, Labour Court [1990] 77 FJR 17; [1990] 3 SCC 682. However, when certain other categories are added then it means that only those additional categories will be included within the definition and none others, vide Mahalakshmi Oil Mills v. State of A.P. [1989] 1 SCC 164; [1988] 71 STC 285 (SC)."

The Court went on to further hold that question of giving a natural meaning to the word ‘interest’ does not arise. The relevant extract from pages 654-655 of the report is reproduced as under :—

"It is open to the Legislature to define words and, if the Legislature has defined it, we cannot go by the meaning in common parlance or what may be called as its ‘natural meaning’. We have to strictly abide by the meaning given to it by the Legislature, as in the present case. The new definition of section 2(7) defines interest only to mean interest on loans and advances. No doubt two other categories have also been included, i.e., 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. We are not concerned with these two additional categories in the present case. Hence, in our opinion, ‘interest’ in the new section 2(7) only means interest on loans and advances, and we cannot give it an extended meaning as contended by learned counsel for the appellant."

13. The Apex Court in Suresh Lohiya v. State of Maharashtra [1966] 10 SCC 397, and also in Kasturi (Dead) By Lrs v. Gaon Sabha. [1989] 4 SCC 55, 58 has held that once a word has been defined in the statute, the Court cannot look elsewhere for its meaning.

14. It has also been contended by revenue that in sub-section (28A) of section 2 of I.T. Act, definition of ‘interest’ includes interest on deposits and the same analogy would apply in this Act also. Since Interest Act specifically defines the expression ‘interest’ it would not be necessary to resort to the meaning assigned to it under a different statute. Sub-section (10) of section 2 of the Act reproduced below, shows that resort can be had to the IT Act only in respect of all other words and expressions which have not been defined under the statute.

"Section 2(10), all other words and expressions used herein but not defined and defined in the Income-tax Act shall have the meanings respectively assigned to them in that Act."

15. We also find that this Act was reintroduced with the intention to enlarge its coverage by extending its applicability to more entities but there was never any intention to enlarge the scope of levy under this statute. The Hon’ble Finance Minister while moving the amendment in its speech has stated as under :

"I am enlarging, slightly, the coverage of this tax. The new tax will be levied on the gross amount of interest received by all banks, financial institutions and non-banking financial companies in the corporate sector on loans and advances made in India."

16. It therefore can conveniently be said that the omission of interest on securities in the new definition brought in statute after its amendment in 1991 was not for enlarging the scope of levy in any manner whatsoever but the scope of amendment was only to cover various entities as referred in the speech by the Hon’ble Finance Minister. From the foregoing discussion we are therefore, of the considered view that interest under the Act is confined to interest on loans and advances only and the same cannot be extended to include interest on bonds and other securities.

17. There is however, another aspect to the issue as to whether the loans and advances shall also includes deposits, so as to charge amount of interest thereon for the purpose of levying tax under this Act. Long drawn arguments were made before us on this aspect also. The dividing line between a loan and deposit is undoubtedly very thin. It is, therefore, essential to understand the distinction between the two on the basis of judicial precedence available on record :

(i)The Hon’ble Supreme Court in the case of Ram Janki Devi v. Juggilal Kamlapat AIR 1971 SC 2551 held as under :

"The case of a deposit is something more than a mere loan of money. It will depend on the facts of each case whether the transactions is clothed with the character of a deposit of money. The surrounding circumstances, the relationship and character of the transaction and the manner in which parties treated the transaction will throw light on the true form of the transaction."

(ii)The Hon’ble Supreme Court in the case of Ram Ratan Gupta v. Director of Enforcement, Foreign Exchange Regulation AIR 1966 SC 495 held as under :

"The expression ‘to lend’ in the ordinary use means to deliver to another a thing or on condition that the thing lent shall be returned with or without compensation for use made of it by the person to whom it lent. The subject-matter of lending also be money. Though a loan contract created a debt, there may be a debt and without contracting a loan, in other words, the concept of debt is more comprehensive than that of loan.

It is settled law that the relationship between the banker and a customer qua debtor and creditor. Though, ordinarily a deposit of an amount in the current account of a bank creates a debt it does not necessarily involve a contract of loan. The question whether a deposit amounts to a loan depends upon the terms of the contract under which the deposit is made. AIR 1962 SC 1764, Ref. to.

When a person deposit foreign currency in the current account of a bank in order to draw it whenever necessary for the purpose for which it was given, it cannot be said that he enters into a contract of loan with the bank within the meaning of section 4(1) of the Act. He only deposits the money for the said purpose, such deposit is not a loan, the person cannot be held to have contravened section 4(1) of the Act."

(iii)The Hon’ble Madras High Court in the case of Abdul Hamid Sahib v. Rahmat Bi AIR 1965 Mad. 427 held as under :

"The terms ‘loans’ and ‘deposits’ are not mutually exclusive terms. There are a number of common features between the two. In a sense a deposit is also a loan with this difference that it is a loan with something more. Both are debts repayable. But, the question as to when the repayment is to be made furnishes the real point of distinction between the two concepts. A loan is repayable the minute it is incurred. But this is not so with a deposit. Either the repayment will depend upon the maturity date fixed therefore or the terms of the agreement relating to the demand, on making of which the deposit will become repayable. In other words, unlike a loan there is no immediate obligation to repay in the case of a deposit. That is the essence of the distinction between a loan and a deposit."

(iv)The Hon’ble Madhya Pradesh High Court again considered this aspect of the matter in the case of Sharda Talkies (Firm) v. Smt. Madhulata Vyas AIR 1996 MP 68. Their Lordships observed as under :

"There is a subtle distinction between a deposit and a loan. In the case of a loan, the amount is given by the creditor to the debtor at the request of and for the requirements and dues of the debtor under certain terms and conditions. In the case of a deposit, the depositee receives money at the instance of the depositor. In the case of a deposit, the requirement of the depositee is neither relevant nor material. The depositor has to go to the depositee for depositing the amount or the depositee may go and collect the amount. But in case a loan, the debtor has to request the creditor to advance certain amount for meeting his requirement for using the amount.

While coming to its conclusions the High Court followed Privy Council decision in Md. Akbhar Khan v. Attar Singh AIR 1936 PC 171, Suleman Haji v. Haji Abdulla AIR 1940 PC 132."

(v)The Bombay High Court had the occasion to consider the distinction between the words ‘loan’ and ‘deposit’ in reference to the provisions of section 370 of the Companies Act, 1956, in Durga Prasad Mandelia v. ROC [1987] 61 Comp. Cas. 479 (Bom.) and held as under :

"In a transaction of a deposit of money or a loan, a relationship of debtor and creditor must come into existence. The term ‘deposit’ and ‘loan’ may not be mutually exclusive, but nonetheless, in each case, what must be considered is the intention of the parties and the circumstances."

It held that the word ‘loan’ would not include deposit.

(vi)Again the Bombay High Court considered the distinction between the words ‘loan’ and ‘deposit’ in reference to the provisions of section 370 of the Companies Act, 1956, in Pennwalt India Ltd. v. ROC [1987] 62 Comp. Cas. 112 (Bom.) and held as under :

"It is true that both in the case of a loan and in the case of a deposit there is a relationship of a debtor and a creditor between the party : giving the money and the party receiving the money. But in the case of a deposit, deposit is usually at the instance of the giver and it is for the benefit of the person who deposit the money-the benefit normally being earning of interest from a party who customarily accepts the deposits. Deposit could also be for safe-keeping or as a security for the performance of an obligation undertaken by the depositor. In the case of a loan, however, it is the borrower at whose instance and for whose needs the money is advanced. The borrowing is primarily for the benefit of the borrower although the person who lends the money may also stand to gain thereby by earning interest on the amount lent. Ordinarily, though not always, in the case of a deposit, it is the depositor who is the prime mover while in the case of a loan, it is the borrower who is the prime mover. The other and more important distinction is in relation to the obligation to return the amount so received. In the case of a deposit which is payment on demand, the deposit would become payable when a demand is made. In case of a loan, however, the obligation to repay the amount arises immediately on receipt of the loan. It is possible that in case of deposits which are for a fixed period or loan which are for a fixed period, the point of payment may arise in different manner. But by and large, the transaction of a loan or transaction of making a deposit are not always considered identical.

‘Loan’ and ‘Deposit’ are not identical in meaning and cannot always be interchanged. Some loans may be deposits and some deposits may be loans. But all loans are not deposits and vice versa.

The facts that both transactions create the relationship of a debtor and a creditor is not enough to equate a loan with a deposit. Nor would it be correct to make distinction between the two only for the purpose of calculating the period of limitation. The nature of two are somewhat different and that is the reason why a distinction is made between the two for the purpose of calculating the period of limitation. If two transactions are identical, there would be no need to prescribe different periods of limitation."

(vii)The Delhi High Court in the case of Baidya Nath Plastic Industries (P.) Ltd. v. K.L. Anand, ITO [1998] 230 ITR 522 also had the occasion to deal with the term ‘loan’ and ‘deposit’ in the context of section 269T of the Income-tax Act. It is held as under :

"In order to determine this question it will be necessary to consider whether the meaning of the term ‘deposit’ ascribed by the Explanation to section 269T includes the term ‘loan’ in its ambit. The distinction between a loan and a deposit is that in the case of the former it is ordinarily the duty of the debtor to seek out the creditor and to repay the money according to the agreement and in the case of the latter it is generally the duty of the depositor to go to the banker or to the depositee, as the case may be, and make a demand for it. This distinction was adopted by the Lahore High Court in the case of Gurcharan Das v. Ram Rakha Mal AIR 1937 Lahore 81. A similar view was expressed by a Division Bench of the Oudh High Court in the case of Chaturgun v. Shahzady AIR 1930 Oudh 395. While drawing the distinction between the words ‘deposit’ and ‘loan’ the court relied upon two earlier decisions of the Madras High Court in V. Balakrishnudu…Plaintiff; v. Narayanaswamy Chetty…Defendant. [1914] 24 IC 852 and Kishtappa Chetty v. Lakshmi Ammal AIR 1923 Mad. 578; 72 IC 842. In this regard, it held as follows (page 396 of AIR 1930 Oudh) :

‘The word ‘deposit’ as pointed out by the Madras High Court in V. Balakrishnudu v. Narayanswamy Chetty [1914] 24 IC 852 is derived from the Latin depositum, a technical word used in the Roman law of bailment for a bailment of a specific thing to be kept for the bailor and returned when wanted, as opposed to commodatum where a specific thing is lent to the bailee to be used by him and returned. In popular language commodatum is translated by the word ‘loan’ and the distinction between deposit and loan is this : that a deposit is to be kept by the depositee for the depositor and the loan is to be kept by the borrower for himself. Thus I deposit my hat in the cloak room. My hat is not to be used by the depositee, but is to be kept for me and returned to me on my demand; but I lend my money to a friend and he can do what he likes with it as long as he returns it to me either on demand or at some specified time. It may be, as observed by Sir Walter Schwabe when Chief Justice of the Madras High Court in Kishtappa Chetty v. Lakshmi Ammal AIR 1923 Mad. 578, that article 145 covers more than the depositum of Roman law, and this Lordship observed that the framers of the Indian Limitation Act ‘meant to use simple and plain language’, but I take this to mean that the word ‘deposit’ is used in the ordinary sense of the word in the English language, and as far as I am aware the word ‘deposit’ does not cover a transaction of the nature of a loan. The transaction that we have to consider is a loan. The plaintiff lent the defendant these ornaments to be used by the latter in a religious procession. There was no question of trust or quasi-trust. It was a mere loan for the benefit of the borrower and in my opinion article 145 has no application’."

18. We have also perused the relevant provisions of Limitation Act, 1963. Articles 19 and 21 of this Act prescribes the period within which suits for recovery can be filed where article 22 deals with the period of limitation for suits for money on account of deposit. The starting period of limitation under articles 19 and 21 on the one hand, and article 22 on the other, are different. Under articles 19 and 21 the cause of action in the case of money lent arises from the date of loan, whereas under article 22 the cause of action in the case of a deposit arises from the date of demand.

19. The ld. DR has sought to distinguish the decision of Division Bench in the case of Punjab National Bank v. Dy. CIT [2003] 87 ITD 11 (Delhi). It was contended that that the Tribunal was persuaded by the majority view being taken at various benches on this issue. From para 73 of that order, it appears to us that the majority view was accepted not for the reason of number game but because of merit of those views. The Apex Court in the case of Commissioner Of Income Tax, Hyderabad v. P.J Chemicals Ltd.. [1994] 210 ITR 830¹ has dealt with a similar contention as under :—

"On a consideration of the matter the view that commends itself as acceptable is the one which has commended itself to the majority of the High Courts. It is, of course, not the numerical strength that prevails—though the fact that a particular view has commended itself to a majority of the High Courts in the country is a matter for consideration—but the tensile strength of the acceptable logic in those decisions. It is aptly said that ‘a judge who announces a decision must be able to demonstrate that he began from recognized legal principles and reasoned in an intellectually coherent and politically neutral way to his result’. In the present case the reasoning underlying, and implicit in, the conclusion reached by the majority of the High Courts cannot be said to be an unreasonable view and on a preponderance of preferability that view commends itself particularly in the context of a taxing statute."

20. Ld. DR also made a feable attempt to include deposits in the term ‘loan and advances’. He, however, did not bring any authority on record for our assistance. For our purpose, the advances, however, only mean advances which are in the nature of loan. Furthermore ‘loan’ and ‘deposits’ cannot be taken to be identical in meaning when a recourse is taken to the provisions contained under the Companies Act, 1956. Section 58A and section 227 of the Companies Act, 1956 in itself clearly place distinction between the two expressions. The Explanation added to section 370 of the Companies Act, 1956 by the Companies (Amendment) Act, 1988 for including deposits for the purpose of loan was for a limited purpose of inter corporate transaction and a similar amendment has not been made in the Act under which the issue is being considered. The revenue’s plea that the decision rendered by Bombay Bench of the Tribunal in LIC’s case (supra) was in respect of statutory Corporation also does not render any assistance to the issue under consideration, since the statute under consideration does not provide for any dichotomy on the applicability of its provision on the basis of status of an assessee.

21. From the following speech of Finance Minister given at the time of introducing the Act, it can be inferred that interest on deposit is not to be included in the definition of interest under this Act :—

"These institutions would reimburse themselves by making necessary adjustments in the interest rates charged from borrowers. The proposed tax is expected to raise the cost of borrowing and yield revenue to the Government."

The interest tax was not to be borne by the lender but by the borrower. In cases of lending made before 1-10-1991 credit institutions were specifically empowered to vary the rate of lending so as to reimburse of the extra charge going to fall on them by the introduction of the Act. Section 26C was specifically introduced in the Act for this purposes. Now in case of deposit there is no such power with the depositor to recover the said amount from the depositee. This again indicates that the two expressions are different.

22. From the foregoing discussion we are of the considered view that despite similarities, the two expressions ‘loans’ and ‘deposits’ are to be taken different and the distinction can be summed up by stating that in the case of loan the needy person approaches the lender for obtaining the loan there from. The loan is clearly lent at the terms stated by the lender. In the case of deposit, however, the depositor goes to the depositee for investing his money primarily with the intention of earning interest. In view of this legal position it has to be held that interest on deposits representing investment of surplus funds would also not fall under the definition of interest as given in section 2(7) of the Act and as such would not be liable to interest tax. The answer to the question under reference in our humble opinion is that investments made by way of short-term deposits and also in the form of securities and bonds cannot be considered as loans and advances and as such interest thereon shall be outside the scope of ‘interest’ defined under section 2(7) of the Act.

23. The parties prayer to hear and dispose of these appeals on merits was allowed. The grounds raised are as under :—

Interest Tax Appeal No. 6/Delhi/2000 for assessment year : 1993-94 :

"1. The lower authorities have erred in subjecting the interest earned on deposits of monies made by the appellant with the following parties, to interest tax.

2. The lower authorities have erred in subjecting the interest of Rs. 41,46,371 and Rs. 1,65,700 from securities namely Bonds issued by REC (Rural Electrification Corporation Ltd.) and NTPC (National Thermal Power Corporation Ltd.) such interests earned are not interest on loans and advances made in India. The additions as per ground No. (2) above is against the correct interpretation of section 2(7) and the purpose and intent expressed by the Finance Minister in his speech at the introduction of the bill."

Interest Tax Appeal No. 7/Delhi/2000 for assessment year 1996-97 :

1. The lower authorities have erred in subjecting the interest earned on deposits of monies made by the appellant with the following parties, to interest tax.

Interest Tax Appeal No. 40/Delhi/2000 for assessment year 1992-93 :

On the facts and circumstances of the case and in law the Assessing Officer erred in adding under the Interest Tax Act a sum of Rs. 10,61,42,597 being the interest received on short-term deposit of surplus moneys by HUDCO with Public Sector Undertakings like SAIL, BHEL, in spite of our submission that the chargeable interest of a credit institution should include only the interest earned and relatable to the loans advanced by it to its borrowers in terms of provision contained in section 5 of the Interest Tax Act read with section 2(7)."

Additional ground common in all the three appeals on the different aspects, on same dispute were raised and allowed to be taken by order dated 26-10-2005 on record.

24. Briefly facts stated are that the assessee-corporation is established with the object of promoting urban development. For this purpose it provides funds to finance various housing project promoted by various organizations including State Governments. During the course of its carrying on the business, assessee, in order to make optimum utilization of the surplus funds, has placed the same as fixed deposit with public sector undertakings like SAIL, BHEL etc. In the first two years under appeal i.e., assessment years 1992-93 and 1993-94, assessee has also invested these surplus funds in the bonds of public sector undertakings like REC & NTPC. It has earned interest on both these investments. While filing the return of chargeable interest the appellant has not included the amount of interest earned on bonds of the aforesaid public sector corporation and interest on deposit placed with public sector corporations, consequently no interest tax was paid on the same. The contention of the assessee was that the interest tax is payable on interest earned on Loans & Advances and not on interest earned by investing funds in bonds or placed in fixed deposit. The Assessing Officer did not agree with the contention of the appellant and held that interest tax is payable on the total amount of interest earned by the credit institution. No distinction can be made on interest earned on Loans and Advances or interest earned on investment of surplus funds either in bonds or fixed deposits. The ld. CIT(A) upheld the order of the Assessing Officer and rejected appellant’s contention. Aggrieved with the orders of lower authorities appellant filed 2nd appeal. It is pertinent to note that for assessment year 1994-95 the ITAT has dismissed assessee’s contention and upheld the order of lower authorities. For the assessment year 1995-96 the ITAT following its earlier year decision dismissed the appellant’s appeal again. It is pointed out that in these two years the issue was non-inclusion of interest earned on the deposit with public sector corporation but issue of interest earned on bonds was not there.

25. In this backdrop, the parties have been heard.

In assessment year 1993-94, the aggregate amount of interest of Rs. 62,04,23,798 on deposits with Steel Authority of India, CANFINA and Canbank Financial Services Ltd. which are subjected to tax are in dispute, in ground No. 1 of the assessee, the Ld. CIT(A) upheld the addition for the amount of interest of Rs. 23,05,33,200 as he did not find any distinction between loan and deposit. In respect of interests of Rs. 10,34,61,929 from CANFINA and Rs. 28,64,28,609 from Canbank Financial Services Ltd. he did not accept this interest is received from other credit institutions covered by the definition under section 2(5A) of the Act. Assessee’s claim that its case, is covered by the definition under section 2(5B) does not appear to have been examined in right perspective. Similar additions are contested in assessment years 1996-97 and 1992-93. By order sheet entry dated 29-8-2005, the Bench directed the appellant to file evidence of transactions involved in these appeals. The appellant, accordingly, placed on record that there is an investment committee which takes decision for deployment of short-term surplus funds as deposits with Public Sector Undertakings and other companies etc. Correspondence resting with some of these parties and resolutions passed by the committee to park its funds on interest have also been placed on record. The appellant has also placed on record a certificate from IFCI that it is a credit institution, for the purpose of this Act and the revenue in subsequent years has accepted this fact. These evidences were not considered by the assessing authority at the time when he took decision on these issues. It is, therefore, considered proper to set aside these additions in all the three appeals and restore the matter back to him for taking decision afresh in the light of decision of Special Bench. Since the resolutions placed on record appear to be on loose sheets he shall be at liberty to examine the credibility and genuineness thereof in the light of judgment of Madras High Court in Sathappa Textiles (P.) Ltd. v. CIT [2003] 181 CTR (Mad.) 344¹. A proper and reasonable opportunity of being heard shall be given to the assessee before taking decision in accordance with law and pass a speaking order thereon.

26. The next ground in assessment year 1993-94 relates to interest of Rs. 41,46,371 and Rs. 16,65,700 from securities, bonds issued by the Rural Electrification Corporation Ltd. and National Thermal Power Corporation Ltd. Having regard to the Special Bench decision interest on securities-bonds is not exigible to tax. The addition, so made therefore is directed to be deleted.

27. In the result, all the three appeals of assessee stand allowed - partly for statistical purposes as announced in the open market.

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1. 145 Taxman 235 . 1. 76 Taxman 611. 1. 126 Taxman 491.