2005 (11) TMI 167 - AT - Income Tax

Tribunal Rules Interest on Inter-Corporate Deposits Non-Taxable; Deletes Unjustified Penalties Under Interest-Tax Act.

The Tribunal allowed the assessee's appeals, ruling that interest on inter-corporate deposits is not taxable under the Interest-tax Act. It determined ... Charge Of Tax - income from interest from intercorporate deposit - chargeable to tax under Interest-tax Act or not ? - HELD THAT:- 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 unutilized 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.' In view of the above rules of interpretation of a taxing statute which will be strictly applied, the interest on inter-corporate deposits unless they clearly fall within the meaning of 'interest on loans and advances' would not be taxable. We accordingly hold that inter-corporate deposit can neither be a loan nor an advance. We, therefore, direct the Assessing Officer to exclude the interest on inter-corporate deposit from the assessment of the assessee. Consequently, the levy of penalty made would also not stand. They are, accordingly, deleted. In the result, all the appeals of the assessee are allowed. Issues Involved:1. Taxability of income from interest on inter-corporate deposits under the Interest-tax Act.2. Applicability of penalties under section 13 of the Interest-tax Act.Detailed Analysis:1. Taxability of Income from Interest on Inter-Corporate Deposits:The primary issue in these appeals was whether the income from interest on inter-corporate deposits was chargeable to tax under the Interest-tax Act. The Assessing Officer (AO) contended that the assessee-company's activities, which included giving inter-corporate deposits and making investments in shares of other companies, fell under sub-sections (ii) and (iv) of section 2(5B) of the Interest-tax Act, 1974. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld this view, emphasizing that the main business of the appellant-company, as per its memorandum of association, included financial operations such as loans, advances, bill discounting, and equity participation.The Tribunal reviewed various case laws to determine the distinction between 'loans' and 'deposits.' It was noted that the terms are not mutually exclusive but have distinct characteristics. For instance, a loan is repayable immediately upon being incurred, whereas a deposit is repayable on demand by the depositor. The Tribunal cited several cases, including the Privy Council's decision in Mohd. Akhar Khan v. Attar Singh and the Supreme Court's decision in Ram Janki Devi v. Juggilal Kamlapat, to illustrate these distinctions.The Tribunal also referred to the definition of 'interest' under section 2(7) of the Interest-tax Act, which includes interest on loans and advances but does not explicitly mention deposits. Cases such as CIT v. United Western Bank and Baidya Nath Plastic Industries (P.) Ltd. v. K.L. Anand, ITO were considered, where courts held that interest on securities and debentures, which are forms of investments, are not the same as interest on loans and advances.The Tribunal concluded that inter-corporate deposits could not be classified as loans or advances. Therefore, the interest earned on these deposits did not fall within the ambit of 'interest' as defined under section 2(7) of the Interest-tax Act. This interpretation was supported by the principle that taxing statutes should be strictly construed, as reiterated by the Supreme Court in cases like Federation of Andhra Pradesh Chambers of Commerce & Industry v. State of A.P.2. Applicability of Penalties under Section 13 of the Interest-tax Act:Given the Tribunal's conclusion that the interest on inter-corporate deposits was not taxable under the Interest-tax Act, the consequent penalties levied under section 13 of the Act were also deemed unjustified. The Tribunal directed the Assessing Officer to exclude the interest on inter-corporate deposits from the assessment of the assessee. Consequently, the penalties imposed were deleted.Conclusion:The Tribunal allowed all the appeals of the assessee, holding that the interest on inter-corporate deposits was not taxable under the Interest-tax Act and that the penalties levied were not sustainable. This decision was based on a thorough analysis of the definitions of 'loans' and 'deposits' and the strict interpretation of taxing statutes.