2001 (4) TMI 77 - HC - Income Tax

Interest-tax liability for credit institutions despite special law protection and CBDT relief; earlier s.10(a) reassessment notices quashed.

The dominant issue was whether a credit institution covered by the Interest-tax Act, 1974 was nevertheless exempted by a statutory protection under a ... Liability to pay tax under the Interest tax Act - Scope of the UTI Act, 1963 - Conflict between the two enactments - Words And Phrases - change of opinion​​​​​​​ - Reassessment - Circular of the CBDT - prospective in nature​​​​​​​ - Wilful failure on the part of the UTI in not filing returns - HELD THAT:- A bare reading of the objects of the UTI Act and the Interest-tax Act shows the legislative intent. In the case of Interest-tax Act, the Legislature intended to enact an economic legislation by which loans given by credit institutions become costlier. Under the Interest-tax Act the burden passes to the borrower. Under the Interest-tax Act, the credit institution can modify the contract with the borrowers. Under the Interest-tax Act, even if the assessee suffers loss in a given year, still the assessee would be liable to pay tax on gross receipts. This clearly shows that even if the UTI was to incur a loss in a particular year, it was liable to pay interest-tax on the basis of the gross receipts under the Interest-tax Act. The subject matter of the UTI Act is commercial whereas the subject matter of the Interest-tax Act is fiscal. When Parliament enacted the Finance (No. 2) Act, with effect from October 1, 1991, the UTI and the LIC were brought expressly within the purview of the Interest-tax Act thereby Parliament impliedly repealed section 32 of the UTI Act to the extent of the interest income which is made taxable under the Interest-tax Act. This discussion is only based on the alternate argument that both the enactments refer to tax on income. Whether the withdrawal communication dated January 29, 2001, issued by the CBDT is retrospective ? - It is well settled that the withdrawal of circulars cannot operate retrospectively. In that sense, circulars under section 119 do not constitute law. They are in the nature of instructions and/or guide lines. Therefore, the communication dated January 29, 2001, will operate prospectively and not retrospectively. At this stage, we may mention that according to the affidavit filed on behalf of the Department, the CBDT has not taken into account the aforestated consequences while issuing the withdrawal communication dated January 29, 2001. The UTI filed its returns under the Income-tax Act. The UTI was given relief under the Income-tax Act on the basis of section 32 of the UTI Act which has been interpreted by the circular dated October 11, 1991. The Interest-tax Act was made applicable to the UTI from October 1, 1991, vide Finance (No. 2) Act of 1991. The Department was fully aware of the Finance Act of 1991. Therefore, it is not open for the Department now to contend that all this was under mistake particularly when the UTI has acted to its detriment. The UTI could have recovered the interest-tax from its borrowers. They were disabled from doing so in view of the CBDT circular dated October 11, 1991. They could not have recovered interest-tax from borrowers in view of the said circular. Even the Finance Ministry did not object to the UTI being given the benefit of the above interpretation. In the circumstances, the Department is now estopped from raising an argument contrary to the interpretation placed by the CBDT. Hence, in this case, we are not going into the question as to whether circulars could be issued by the CBDT contrary to law and the effect of such circulars. We do not wish to delve into judgments cited on the said point. We are confining our judgment to the facts of this case. We are confining this judgment to the rights created in favour of the UTI and the unitholders by virtue of the interpretation placed by the CBDT and on the basis of the implementation of the circular of the CBDT for nine years by the Department. However, the Department is estopped from arguing contrary to the circular till it is revoked. Hence, we do not wish to examine numerous judgments cited on both sides before us by rival parties on the above question. Whether section 10(a) of the Interest-tax Act has been validly invoked vide notices dated December 21, 2000. - In this case, the Department has invoked the expression 'failure' and not 'omission'. Therefore, the judgment has no application to the facts of this case. On facts of our case, we hold that there was no wilful failure on the part of the UTI to file its returns. Secondly, in the said judgment, the Bombay High Court has laid down that the word 'omission' is a colourless word. However, the said judgment helps the UTI. In Pannalal Nandlal Bhandari [1955 (9) TMI 66 - BOMBAY HIGH COURT], the Bombay High Court has observed that the expression failure connotes that there is an obligation on the part of the assessee which has not been carried out and if there was no obligation on the assessee to make a return then the expression 'failure' would not get attracted. That, the word 'omission' is a colourless word which merely refers to not doing of something and if the assessee does not make a return it is an omission on his part, whether the law casts any obligation upon him to make a return or not. In this case, Department has not invoked the word 'omission'. In this case, the Department has invoked the word 'failure'. On facts, in this case, there is no wilful failure. In view of the circular of the CBDT dated October 11, 1991, the UTI could not have recovered interest-tax from its borrowers and, therefore, it was not obliged to make a return under section 7 of the Interest-tax Act. Therefore, the judgment of the Bombay High Court reported in Pannalal Nandlal Bhandari, supports the case of the UTI. The Interest-tax Act, 1974, is applicable to the UTI. However, in view of the circular of the CBDT dated October 11, 1991, the Interest-tax Act, 1974, will not apply up to January 29, 2001, when the earlier circular has been withdrawn. That the withdrawal communication of the CBDT dated January 29, 2001, will operate prospectively and not retrospectively. That the impugned notices dated December 21, 2000, issued under section 10(a) of the Interest-tax Act, 1974, in respect of the accounting years 1991-92 up to 1998-99 are invalid in law and are hereby set aside. Accordingly, both the above writ petitions are partly allowed with no order as to costs. Issues Involved:1. Whether the interest-tax under the Interest-tax Act, 1974, is a tax on income and whether interest accruing to the UTI from loans advanced by it stands exempted u/s 32 of the UTI Act, 1963.2. Whether the communication dated January 29, 2001, withdrawing the letter/circular dated October 11, 1991, issued by the CBDT was retrospective and whether the Interest-tax Act, 1974, was applicable for the accounting years 1991-92 to 1998-99.3. Whether the Department was right in invoking section 10(a) of the Interest-tax Act, 1974, for failure on the part of the UTI to file returns under the Interest-tax Act, 1974.Summary of Judgment:Issue 1: Tax on Income and Exemption u/s 32 of UTI ActThe court examined whether the interest-tax under the Interest-tax Act, 1974, is a tax on income and if so, whether interest accruing to the UTI from loans advanced by it stands exempted u/s 32 of the UTI Act, 1963. The court concluded that the Interest-tax Act is not a tax on income but a tax on gross receipt of interest. The court stated, 'The Interest-tax Act is a code by itself...it is not a tax on income.' Therefore, section 32 of the UTI Act does not provide exemption from interest-tax. The court answered this issue in the negative, in favor of the Department and against the UTI.Issue 2: Retrospective Withdrawal of CBDT CircularThe court considered whether the communication dated January 29, 2001, withdrawing the CBDT circular dated October 11, 1991, was retrospective. The court held that the withdrawal cannot operate retrospectively as it would cause immense consequences and hardship to the UTI. The court stated, 'The withdrawal communication of the CBDT dated January 29, 2001, will operate prospectively and not retrospectively.' Therefore, the court answered this issue in the negative, in favor of the UTI and against the Department.Issue 3: Invocation of Section 10(a) of the Interest-tax ActThe court examined whether the Department was right in invoking section 10(a) of the Interest-tax Act, 1974, for failure on the part of the UTI to file returns. The court found that there was no wilful failure on the part of the UTI to file returns as the UTI acted based on the CBDT circular dated October 11, 1991. The court stated, 'There was no wilful failure on the part of the UTI to file its returns.' Therefore, the court answered this issue in the negative, in favor of the UTI and against the Department.Summary of Findings:1. The Interest-tax Act, 1974, is applicable to the UTI. However, in view of the CBDT circular dated October 11, 1991, the Interest-tax Act, 1974, will not apply up to January 29, 2001, when the earlier circular was withdrawn.2. The withdrawal communication of the CBDT dated January 29, 2001, will operate prospectively and not retrospectively.3. The impugned notices dated December 21, 2000, issued u/s 10(a) of the Interest-tax Act, 1974, in respect of the accounting years 1991-92 up to 1998-99 are invalid in law and are hereby set aside.Both writ petitions were partly allowed with no order as to costs.