2016 (6) TMI 1115 - HC - Income Tax

Inter-corporate deposits not considered loans for interest tax. High Court rules in favor of assessee.

The High Court ruled in favor of the assessee, holding that inter-corporate deposits do not fall under the definition of loan or advance as per the ... Addition of interest of inter-corporate deposits to the chargeable interest under the Interest Tax Act, 1994 - Held that:- The question raised in these appeals is already settled by a judgment of the Delhi High Court rendered in the case of Commissioner of Income-tax v. Visisth Chay Vyapar Ltd., [2011 (8) TMI 783 - Delhi High Court ] wherein, it has been held that the expression ‘advance’ occurring in section 2(7) along with the expression ‘loan’ should take its colour from ‘loan’ and cannot be given wider interpretation to include deposit as well, otherwise, money deposits given for investments, etc., would also qualify as ‘advances’ and interest thereon would become exigible to the Interest-tax Act. Such a situation was never contemplated by the legislature. Hence, inter-corporate deposit is not in the nature of loan or advance within the meaning of section 2(7) and therefore, not chargeable to the interest-tax under section 5. We concur with the view taken by the Delhi High Court in the aforesaid decision and consequently, answer the question in favour of the assessee Issues:Identification of substantial question of law under Section 260A of the Income-tax Act, 1961 related to the deletion of interest on inter-corporate deposits from chargeable interest under the Interest Tax Act, 1994.Analysis:The appeals involved identical legal questions and were heard together. The substantial question of law was whether the Appellate Tribunal was correct in confirming the order deleting interest on inter-corporate deposits from chargeable interest under the Interest Tax Act, 1994. The lead matter, Tax Appeal No.117/2009, involved an assessment completed under the Interest Tax Act, 1974, with subsequent revisions and appeals. The Tribunal had set aside an earlier order, leading to further revisions and appeals. Ultimately, the chargeable interest was determined, and the CIT(A) confirmed the addition of a specific amount while directing the exclusion of interest received on inter-corporate deposits, which was not excluded in the initial assessment. The Revenue appealed this decision, leading to the current appeal.The High Court considered a judgment from the Delhi High Court, which clarified that the expression 'advance' in conjunction with 'loan' should be interpreted narrowly, taking its meaning from 'loan' itself. The broader interpretation to include deposits as advances would lead to unintended consequences where deposits for investments could also attract interest tax. The Delhi High Court held that inter-corporate deposits do not fall under the definition of loan or advance as per section 2(7) and are not chargeable to interest tax under section 5. The High Court concurred with this interpretation and ruled in favor of the assessee and against the Revenue. Consequently, all appeals were dismissed with no order as to costs.