Interest on permanent investment securities not taxable under the Interest-tax Act; loans and advances remain the relevant charging base.

Interest on securities, bonds and debentures held by a banking company as permanent investments is not chargeable to interest-tax under section 2(7) of the Interest-tax Act, 1974, because the Act taxes interest on loans and advances and not investment income. The Court treated the omission of the earlier express exclusion of interest on securities from section 2(7) as clarificatory, not as widening the charging provision. It also distinguished lending from investing in banking accounts and balance-sheets, noted the limited role of section 26C, and held that taxing Government securities held as permanent investments would be inconsistent with the Act's anti-inflationary object.

---

---

Issues: Whether interest on securities, bonds and debentures held by a banking company under the category of permanent investments is chargeable to interest-tax as part of loans and advances under section 2(7) of the Interest-tax Act, 1974.

Analysis: The statutory scheme of the Interest-tax Act was read as imposing tax only on interest earned on loans and advances, not on investment income. The deletion of the earlier express exclusion of interest on securities from section 2(7) with effect from 1 October 1991 was treated as clarificatory and not as an expansion of the charging provision. The Court relied on the distinction between loans/advances and investments in banking accounts and balance-sheets, the limited operation of section 26C of the Interest-tax Act, and the commercial and accounting difference between lending and investing. The object of the Act, being to discourage borrowings and operate as an anti-inflationary measure, was held to be inconsistent with taxing interest on Government securities held as permanent investments.

Conclusion: Interest received by the assessee-bank on securities and debentures held as permanent investments is not liable to interest-tax under section 2(7) of the Interest-tax Act, 1974. The question was answered in the affirmative in favour of the assessee and against the Department.

---