2014 (9) TMI 702 - HC - Income Tax

Debenture interest not chargeable under Interest Tax Act, court affirms. Notional interest excluded.

The High Court dismissed the appeals, affirming that interest on debentures does not constitute chargeable interest under the Interest Tax Act. It was ... Interest on debentures - Whether the Tribunal is right in holding that interest on debentures will not form part of chargeable interest under the Interest Tax Act – Held that:- Following the decision in Commissioner of Income-Tax V. Sahara India Savings and Investment Corporation Ltd. [2009 (11) TMI 25 - SUPREME COURT OF INDIA] - the interest-tax is meant to be levied only on interest accruing on loans and advances but the Legislature has extended the meaning of the word 'interest' to two other items, namely, commitment charges and discount on promissory notes and bills of exchange - interest on loans and advances will not cover u/s 2(7) interest on bonds and debentures bought by an assessee as and by way of 'investment' - Even the exclusionary part of section 2(7) excludes only discount on treasury bills as well as interest under section 42(1B) of the Reserve Bank of India Act, 1934 – Decided against revenue. Addition of notional interest - Whether the Tribunal is right in holding that addition of notional interest are to be reckoned with for the purpose of calculating the chargeable interest under the Interest Tax Act – Held that:- CIT(A) has given a clear finding that notional interest can never be considered as part of chargeable interest - the notional interest brought to tax under Interest Tax Act has never been considered as part of interest accrued or arisen in the books of account, namely, profit and loss account and therefore, the question of adding notional interest was declined - The Tribunal has not gone into the issue at all – CIT(A) was correct in deleting the addition of notional interest - Revenue has not shown any provision whereby, notional interest can be included for the purpose of tax – Decided against revenue. Issues Involved:1. Whether interest on debentures forms part of chargeable interest under the Interest Tax Act.2. Whether notional interest should be included for calculating chargeable interest under the Interest Tax Act.3. Applicability of the judgment in Lakshmi Vilas Bank case post-amendment of the Interest Tax Act after the assessment year 1991-92.Detailed Analysis:Issue 1: Interest on Debentures and Chargeable Interest under the Interest Tax ActThe primary issue was whether interest earned on debentures should be considered as chargeable interest under the Interest Tax Act. The assessee claimed exemption, arguing that the nature of the investment in debentures was not chargeable under the Act. The Assessing Officer included the interest on debentures in the chargeable interest. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) both relied on the Madras High Court decision in CIT v. Lakshmi Vilas Bank, which held that debentures are different from loans and advances and thus not chargeable under the Interest Tax Act. This position was affirmed by the Supreme Court in Commissioner of Income-Tax V. Sahara India Savings and Investment Corporation Ltd., which clarified that 'interest on investments' is not taxable as interest under section 2(7) of the Interest Tax Act.Issue 2: Addition of Notional InterestThe second issue was whether notional interest should be included in the chargeable interest. The assessee contended that notional interest, which was never received or receivable, falls outside the purview of chargeable interest under the Interest Tax Act. The Commissioner of Income Tax (Appeals) upheld this view, stating that notional interest cannot be considered as part of chargeable interest, drawing an analogy with interest on bad and doubtful debts which are not included unless credited to the profit and loss account. The Tribunal did not specifically address this issue, but the High Court confirmed that notional interest is not included in the definition of 'interest' under Section 2(7) of the Interest Tax Act, and thus should not be added for tax purposes.Issue 3: Applicability of Lakshmi Vilas Bank Judgment Post-AmendmentThe third issue was whether the judgment in Lakshmi Vilas Bank, which dealt with pre-amended provisions of the Interest Tax Act applicable up to the assessment year 1991-92, was still relevant. The Revenue argued that post-1991 amendments, interest on debentures should be included. However, the Supreme Court's decision in the Sahara case clarified that even after the amendments, the definition of 'interest' under section 2(7) did not extend to interest on debentures. The High Court concluded that the Lakshmi Vilas Bank judgment remains valid and applicable.Conclusion:The High Court dismissed the appeals, confirming the orders of the Tribunal and answering all substantial questions of law against the Revenue and in favor of the assessee. The court held that:1. Interest on debentures does not form part of chargeable interest under the Interest Tax Act.2. Notional interest cannot be included for calculating chargeable interest.3. The Lakshmi Vilas Bank judgment remains applicable post-amendment of the Interest Tax Act.The appeals were dismissed with no costs, and the Tax C.M.P No.1 of 2014 was closed.