TaxTMI 
TaxTMI 
2001 (3) TMI 1021
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntative which is contrary to ITAT Rules. However, the common issue is that the assessee in all these appeals is aggrieved against inclusion of interest on debentures, bonds and government securities in the total amount of interest on loans and advances and subjecting it to interest tax under the Interest-tax Act, 1974 (the Act). 3. Assessee, that is, Life Insurance Corporation of India (LIC for short) is a body corporate established under the Life Insurance Corporation Act, 1956 (LIC Act for short), primarily to carry on life insurance business in or outside India. For the years under consideration, assessee filed its returns of chargeable interest showing chargeable interest as follows : Assessment year Chargeable Interest Returned Rs. 1992-93 481,14,37,010 1993-94 933,28,14,120 1994-95 1135,32,44,426 1995-96 1363,22,22,210 1996-97 1242,67,40,190 It was claimed by the assessee that it had not taken into account interest on Government of India Securities (Government securities for short), debentures and bonds for the purpose of chargeable interest under the Act as the same could not be classified as interest....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be given effect. Reference was made to CBDT's instruction No. 1923 dated 14-3-1995. In view of the foregoing discussion, Assessing Officer included interest on debentures, bonds and Government securities in total interest exigible to interest tax. The order for assessment year 1992-93 was followed in the rest of the assessment years under consideration. The details of additions made in each year are as follows : Assessment year Interest on debentures, bonds, securities etc. Rs. Total chargeable interest - Rs. 1992-93 874,91,00,000 1356,05,37,010 1993-94 2171,48,00,000 3104,76,14,120 1994-95 2754,09,00,000 3889,41,44,426 1995-96 3675,14,00,000 5038,36,22,210 1996-97 4773,91,00,000 60,16,58,40,190 7. The above assessments were challenged before the CIT(A). In his introductory remarks, the CIT(A) has stated that whether debentures etc. are loans and advances or not, has to be examined not with reference to the credit institution, but it has to be examined with reference to legal principles. Next, it is stated that the expression "loans and advances" is neither defined in the Interest-tax Act nor in any other ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Liability to tax would be determined with reference to the interpretation of the statute which created it and not by referring to another statute; (iv)substance of the matter cannot be altered by a mere method of accounting. Based on the above discussion, CIT(A) observed that showing debentures etc. under the head "investment" in view of the provisions of the Compa- nies Act or Banking Regulation Act cannot be relevant for the purpose of determining the scope of expression "loans and advances" under section 2(7) of the Interest-tax Act. 11. In para 5, CIT(A) refers to certain decisions of the Hon'ble Courts which have considered the expression "loans and advances". Reference is made to the decision of the Bombay High Court in the case of CIT v. P.K. Badiani [1970] 76 ITR 369 for the proposition that if the payment is made by the lender to the borrower, then such payment would amount to loan because the relationship of the creditor and borrower is created by such transaction. Another decision of the Bombay High Court in the case of CIT v. Jamnadas Khimji Kothari [1973] 92 ITR 105 is referred to for the proposition that if there are such transactions between two parties and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....own as securities. But their declaration as such do not change or damage the character of loans. Section 40(a)( i) of the Income-tax Act is referred wherein it is clarified that government securities are loans issued for public subscription. Thus, interest on government securities is held to be includible in total interest under section 2(7) of the Act. 15. In para 9, CIT(A) states that government loans, bonds etc., are declared as securities for specific purposes so that a public charitable trust may acquire such securities either by purchase or by subscription. The declaration of securities in respect of loan does not in any way violate the fundamental and essential element of loans and advances. 16. In para 12, CIT(A) refers to the Rule of "Ex Visceribus Actus" and observes that other provisions of the same statute will have to be considered while interpreting the expression or word in a particular provision because the other provisions of the statute will be extremely helpful in exposing the context in which the expression "loans and advances" has been used. In this context he refers to section 28 of the Act, which according to him, postulates that there are various categ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hemselves by making necessary adjustments in the interest rates charged from the borrower. According to the CIT(A), the speech of the Finance Minister refers only to term loans mentioned in section 26C of the Act. It is further observed that it is nowhere mentioned that only those loans and advances are subject matter of interest tax in which interest rate can be increased by the institutions. Finally, it is observed that section 28 of the Act clearly demonstrates that there are various categories of loans and advances and, therefore, the term "loans and advances" in section 2(7) should be considered from a legal and proper sense. 20. Based on the above discussion, broadly noted by us in paras 7 to 19 above, CIT(A) held that the Assessing Officer was justified in including the interest on debenture, bonds and government securities in the total amount of interest on loans and advances. 21. Mr. P.J. Pardiwalla, Advocate, appeared for the assessee. At the outset, the learned counsel gave a brief history of the Interest-tax Act which was introduced in 1974. The objects and reasons for enacting the legislation were referred to ( 196 ITR 31 statute). The tax was withdrawn in 1978, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lls of exchange drawn or made in India; but does not include (i )interest referred to in sub-section (1B) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934), (ii)discount on treasury bills." The contention was that the definition uses the expression "means and includes" which indicates that the definition is exhaustive and hence interest on government securities and debentures will not form part of chargeable interest under the Act. The main thrust was to charge interest earned on loans and advances and not the interest earned on investments. To explain the purport of the expression "means and includes", reliance was placed on the decision of the Supreme Court in the case of Mahalakshmi Oil Mills v. State of Andhra Pradesh AIR 1989 SC 335. 23. To drive home the point that making of loans was distinct from investing in securities, Mr. Pardiwalla referred to the wordings in sections 27 and 27A of the Insurance Act, 1938. It was submitted that both the sections used the expressions "shall invest" and "keep invested". Accord- ing to him these expressions indicated merely investment in securities and not making of loans. The Form of balance sheet prescribed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ardiwalla was that this notification should be treated as clarificatory in nature, and moreover, section 26C of the Act bears testimony to the fact that credit institutions could reimburse themselves to the extent of interest tax by varying the terms of agreement. Reliance was also placed on the decision of the Bombay High Court in the case of CIT v. Aloo Investment Co. (P.) Ltd. [1980] 123 ITR 1322 . 27. Alternatively, it was contended by Mr. Pardiwalla that if at all interest tax has to be levied on interest on securities, debentures etc., only that portion should be taxed which has been earned on direct subscription and not on those securities which are purchased from the market. 28. Finally, it was submitted that where two views are possible, the one favouring the assessee should be adopted. For this contention, reliance was placed on the decisions of the Supreme Court in the case of CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308 1 and in the case of Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775 2. 29. Mr. S.D. Kapila, the learned D.R., assisted by Mr. Deepak Tralshawala, presented the case for the department. At the outset, it was sought to be clarified that LIC i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vernment securities and making of loans. Section 29(3) prohibited the insurer from granting any loan except as specified in section 27A. Again, it was submitted, section 27A provided for various modes of investments, which, inter alia, included making of loans as well as investment in securities. Section 6 of the LIC Act and Rule 10B(h) of the Insurance Rules, 1939 were also referred to. In short, by referring to all these provisions, Mr. Kapila tried to impress upon us that there was no distinction between investments made in government securities, bonds, debentures on one hand, and investment made by way of loans on the other. The segregation in balance sheet into loans and investment in securities was a matter of form and presentation and it did not give the true character of the investment of funds. 30. The meaning of the term "investment" as given in Black's Law Dictionary was referred to. As per the said dictionary, it was an expenditure to acquire property or other assets in order to produce revenue, or the asset so acquired. It also meant placing of capital or laying out of money in a way intended to secure income or profit from its employment. Similarly, the meanings of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rom the purview of the Act. Dropping of this provision in the new version could not be said to be clarificatory, because, with the omission of the head "Interest on securities" and consequential omission of sections 18 to 21, section 2(28B) was inserted in the Income-tax Act defining the term "interest on securities". Reference was made to Notification No. 9858/F.No. 160/2/94-ITA-I dated 11-9-1995 issued under section 28 of the Act whereby banking companies were specifically exempt from the levy of interest tax in respect of their income from interest on securities with effect from financial year 1995-96. In this connection it was submitted that this was a Notification by a proper authority by way of delegated legislation which could be struck down only by a High Court or Supreme Court and hence, Tribunal was bound to give full effect by not exempting LIC from the levy of interest tax. Instruction No. 1923 dated 14-3-1995 issued by the Board was also referred to. As per the said Instruction, by not incorporating the exclusionary provision (i.e., relating to Interest on securities), in the new version of the Act, natural meaning of the word "interest" as defined in section 2(7) of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... also supplemented the arguments advanced by Mr. Kapila. Our attention was drawn to paras 4.1 and 4.2 of the CIT(A)'s order. The observations of the CIT(A) in these paras are summarized by us in paras 7 and 8 of this order. Then our attention was drawn to paras 5.1, 5.3 and 5.5 of the CIT(A)'s order. These observations are summarized by us in para 11 of this order. Pages 13, 16, 19, 20 and 23 of the CIT(A)'s order were referred to. The observations on these pages have been noted by us in paras 12, 13, 14 and 15 of this order. 36. After referring to the above-mentioned observations in the order of the CIT(A), two main points were stressed by Mr. Tralshawala. Firstly, it was submitted that since the term "loans and advances" is not defined in any of the taxing statutes, its meaning as understood commonly should be adopted. Secondly, it was contended that the expression "means and includes" suggests that the definition is intended to be exhaustive and not extensive. Heavy reliance was placed on the decision of the Supreme Court in the case of P. Kasilingam v. P.S.G. College of Technology AIR 1995 SC 1395. It was contended that this decision was also considered by the Allahabad Ben....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d upto 31-3-1985. Finance (No. 2) Act, 1991 again brought into force the Act with effect from 1-10-1991. The operation of the Act has again been suspended since 1-4-2000. In its last reincarnation in 1991, the Act was put into operation with added vigour and vitality. During the first tenure of its operation, the Act was applicable only to scheduled banks. During the second tenure, the definition of "scheduled banks" was widened to include institutions like IFCI, IDBI, IRCI and ICICI. In the third tenure, the scope was further widened by amending the charging section 4 to include credit institutions and make them liable to tax. Simultaneously, clause (5A) was added in section 2 to define the term "credit institution". By the term "credit institution" was meant, (i) a banking company to which the Banking Regulation Act, 1949 applies, (ii) a public financial institution as defined in section 4A of the Companies Act, 1956, (iii) a State Financial Corporation, and (iv) any other financial company. Consequently, clause (5B) was also added to section 2 to define the term "financial company". In the present appeals we are not concerned with the term "financial company" as defined in secti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Amended definition : Section 2 : "(7) 'interest' means interest on loans and advances made in India and includes- (a )commitment charges on unutilized portion of any credit sanctioned for being availed in India; and (b)discount on promissory notes and bills of exchange drawn or made in India; but does not include- (i)interest referred to in sub-section (1B) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); (ii)discount on treasury bills;" Much has been argued before us about the expression "means and includes" appearing in the above definition. The two sides have referred to two different decisions of the Supreme Court. Let us consider those decisions : Mahalakshmi Oil Mills' case (supra) relied upon by assessee : The Supreme Court was considering the following definition of "tobacco" as defined in Central Excises and Salt Act, 1944 : "Tobacco means any form of tobacco, whether cured or uncured and whether manufactured or not and includes the leaf stalks and stems of tobacco plant, but does not include any part of a tobacco plant while still attached to the earth." The question was whether tobacco seed, tobacco seed oil and tobac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly such things as they signify according to their natural import, but also those things which are interpretation clause declares that they shall include. But the word "include" is susceptible of another construction, which may become imperative, if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions defined. It may be equivalent to "mean and include", and in that case it may afford an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably by attached to these words or expression." Looking therefore, at the terms of the definition more closely, it is quite clear that tobacco seeds do not fall within the second or inclusive part of the definition. This part of the definition is important. Specifically excludes from the definition any part of the tobacco plant so long as it is still attached to the earth. It makes mention only of parts of the plant after it is served from the earth. It is common knowledge that when a plant is served from the earth, its parts will comprise of not only the leaves, stalks and stems but also the seeds. Yet the in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rest-tax Act. Primarily, the term "interest" is meant to be interest on loans and advances. But the definition does not stop here. It goes on to include two more items. The two items are commitment charges on unutilized portion of credit and discount on promissory notes and bills of exchange. As per the natural import of the term "interest", but for the specific inclusion, these would not have been considered as interest. It is perceived that, though by nature as well as nomenclature, the two items may not strictly be regarded as interest, but they have some hue of interest and hence the meaning of the term "interest" is extended to include these two items. But the extension has to stop here only and cannot go further. There may be some other items also which, though strictly may not be interest, but may be having some characteristics of interest. However, considering the meaning of the expression "means and includes" as explained by the above two decisions of the Supreme Court, no more items can be included in the definition except the two specifically included by the Legislature. 45. Having discussed the principles of interpretation, we now proceed to actually interpret the de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s and bonds are often used interchangeably and sometimes Central or State Government loans are described as Government bonds. In short, these are all fixed interest bearing securities or debt instruments and except where necessary, we shall commonly refer to them as bonds. 47. Much stress has been laid by Mr. Kapila on sections 27A and 27B of the Insurance Act which contain provisions regarding investments. The crux of his argument is that the said provision does not make any distinction between loans and securities. Both are treated as investments. He has also referred to the meaning of the term "investment" as given in Black's Law Dictionary. Amongst the several meanings, the meaning relevant for our purpose is "the placing of capital or laying out of money in a way intended to secure income or profit from its employment". In short, his thrust has been on the meaning of the term "investment" and according to him, so far as insurance sector is concerned, the term "investment" has wider amplitude and in the most comprehensive sense it includes loans also. 48. There cannot be any quarrel over the characteristics of the bonds discussed by the CIT(A), and also, there cannot be a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is amply reflected in the speeches of the Finance Minister, both, while reviving the levy as well as while withdrawing the levy. The intention is to make credit costlier or cheaper as the case may be. When credit institutions play to the tune of market conditions in the money market, or vice versa, making or changing investment or disinvestment decisions by the minute, where does the intention of making credit cheaper or costlier lie in all this maze ? Earlier in this para we have mentioned that by investing in these instruments, without doubt, a debtor-creditor relationship is created. But this situation by itself cannot lead us to conclude that assessee has advanced loan to the issuer of the securities. In para 45 above, we have reproduced the meaning of the term "loan" as given in the Law Lexicon by P. Ramanatha Aiyar. It is explained that when a person deposits money in a bank, a debtor-creditor relationship is created, but the transaction cannot be regarded as a loan. Similar is the case of investment in debt instruments by the credit institutions. Simply because a debtor-creditor relationship is created, it cannot be regarded as a loan transaction. Considering the distinct ch....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unt, in effect is nothing but rent for making available the money before it is due. The rent would normally cover interest for the period of the bill and some additional charges. The purchaser of the bill is the financier and recovers interest by discounting the bill. Thus, our view expressed earlier gets stronger that tax under the Act is sought to be levied only where there is an inention to actually finance the borrower. One who gets the bill discounted is the borrower. He avails of the finance and pays for it in the form of discount deducted by one who provides the finance. Because of its nomenclature, perhaps discount on promissory notes and bills of exchange may have escaped interest tax, though, in essence it is interest earned on making finance available. Therefore, the meaning of the term "interest" is extended to discount on promissory notes and bills of exchange. 51. Much has been argued on the definition of the term "Government Security" as defined in Public Debt Act, 1944. For immediate reference, we reproduce the definition below : "'Government security' means- (a )a security, created and issued, by the Government for the purpose of raising a public loan, and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly included in the definition of the term "interest". We are unable to agree to this contention for the reasons that follow. 54. Firstly, if it was the intention of the Legislature to include interest on securities, while amending the definition in 1991, it could have specifically included it in the upper portion of the definition when commitment charges and discount or promissory notes were specifically included. Hence, Legislature was conscious that interest on securities has not to be taxed under the Act. Only interest on loans made with the sole purpose of financing the borrower is to be taxed. Earlier, we have discussed in detail that this activity of financing the borrower is distinct from investing in securities where yield and capital appreciation is an important consideration. This gets confirmed from the Memorandum explaining the provisions which is reported in 190 ITR 317 (St.) wherein it is mentioned that "As an anti-inflationary measure, the Bill seeks to revive the levy of interest-tax...". We fail to understand that when the main purpose of investing in the securities is to play in money market, how levying tax on such interest would act as an anti-inflationary me....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nmental bonds and debentures. In our opinion, by subscribing to such bonds and debentures, it does not affect the money market at all. The Legislature was aware of all these economic considerations and, therefore, consciously did not include interest on securities while amending the definition in 1991. When the main definition does not include interest on securities, merely because the specific exclusion is deleted, its automatic inclusion in the main definition cannot be inferred. There is no scope for any intentment. This view of ours gets fortified by the following observations of the Bangalore Bench of the Tribunal in the case of Canara Bank v. Dy. CIT [Int. Tax Appeal Nos. 5 to 8 (Bang.) of 1997, dated 16-9-1997], we reproduce the relevant para 12(i) of the order : "For the foregoing, we have to hold that though 'interest on securities' has not been specifically excluded from the purview of the Interest-tax Act (No. 45/1974), there is no circumstance available to hold that interest on securities is intended to be taxed under the provisions of the Interest-tax Act (45/1974) as amended by Finance Act, 1992. As stated earlier, exclusion of interest on securities from the taxab....