TaxTMI 
TaxTMI 
2009 (11) TMI 25
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.... in force. 3. For deciding the afore-stated issue, one needs to examine the provisions of the Interest Tax Act, 1974 as under: "2.In this Act, unless the context otherwise requires,- "(5) "chargeable interest" means the total amount of interest referred to in section 5, computed in the manner laid down in section 6;" " (5A) "credit institution" means,- (i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); (ii) a public financial institution as defined in section 4A of the Companies Act, 1956 (1 of 1956); (iii) a State Financial Corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporation Act, 1951 (63 of 1951); and (iv) any other financial company." (5B) "financial company" means a company, other than a company referred to in sub-clause (i), (ii) or (iii) of clause (5A), being- (i) a hire-purchase finance company, that is to say, a company which carries on, as its principal business, hire-purchase transactions or the financing of such transactions; (ii) an investment company, that is to s....
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....h chargeable interest: Provided that the rate at which interest-tax shall be charged in respect of any chargeable interest accruing or arising after the 31st day of March, 1983 shall be three and a half per cent, of such chargeable interest. (2) Notwithstanding anything contained in sub- section (1) but subject to the other provisions of this Act, there shall be charged on every credit institution for every assessment year commencing on and from the 1st day of April, 1992, interest-tax in respect of its chargeable interest of the previous year at the rate of three per cent of such chargeable interest: Provided that the rate at which interest-tax shall be charged in respect of any chargeable interest accruing or arising after the 31st day of March, 1997 shall be two per cent of such chargeable interest. (3) Notwithstanding anything contained in sub- sections (1) and (2), no interest-tax shall be charged in respect of any chargeable interest accruing or arising after the 31st day of March, 2000." "Scope of chargeable interest 5. Subject to the provisions of this Act, the chargeable interest of any previous year of a credit institution shall be the total amount of interest....
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....e the provisions quoted herein-above.Section 2(5) defines "chargeable interest" to mean total amount of interest referred to in section 5, computed in the manner laid down in section 6. In other words, the "scope of chargeable interest" is defined under section 5 whereas "computation of chargeable interest" is under section 6. Section 2(7) is the heart of the matter as far as the present case is concerned. 5. In accounting sense, there is a conceptual difference between loans and advances on one hand and investments on the other hand. Section 2(7) defines the word "interest" to mean interest on "loans and advances including commitment charges, discount on promissory notes and bills of exchange but not to include interest referred to under section 42(1B) of the Reserve Bank of India Act, 1934 as well as discount on treasury bills". Section 2(7), therefore, defines what is interest in the first part and that first part confines interest only to loans and advances, including commitment charges, discount on promissory notes and bills of exchange. Pausing here, it is clear that the interest tax is meant to be levied only on interest accruing on loans and advances but the Legislature, i....
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....s by way of an anti-inflationary measure. In an inflationary situation, the cost of borrowing for the Government also increases. One of the ways by which the cost of borrowing can be reduced is to see that companies like the respondent herein are made to invest in bonds and securities so that the Government is able to borrow monies at a cheaper rate as compared to its borrowings in the market. It is precisely for this reason that the Reserve Bank of India, which is a Regulator and which is responsible for the credit management of the economy and which is empowered to issue Directions from time to time not only with the object of regulating the credit but also to control businesses like non-banking financial companies and residuary non-banking companies by issuing directions under Chapter IIIB of the Reserve Bank of India Act, issues directions and one of such directions which has been issued in the present case is called as "Residuary Non-Banking Companies (Reserve Bank) Directions, 1987. These Directions have been issued under sections 45J and 45K of the Reserve Bank of India Act, 1934. 8. We quote herein-below relevant provisions of Chapter IIIB of the Reserve Bank of India Act,....
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....nking financial company to any person or a company or to a group of companies." "45K. Power of Bank to collect information from non-banking institutions as to deposits and to give directions.-(1) The Bank may at any time direct that every non-banking institution shall furnish to the Bank, in such form, at such intervals and within such time, such statements information or particulars relating to or connected with deposits received by the non- banking institution, as may be specified by the Bank by general or special order. (2) Without prejudice to the generality of the power vested in the Bank under sub-section (1), the statements, information or particulars to be furnished under sub-section (1), may relate to all or any of the following matters, namely, the amount of the deposits, the purposes and periods for which, and the rates of interest and other terms and conditions on which, they are received. (3) The Bank may, if it considers necessary in the public interest so to do, give directions to non- banking institutions either generally or to any non-banking institution or group of non-banking institutions in particular, in respect of any matters relating to or connected with t....
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....ctor banks or invest and keep invested in unencumbered approved securities or in other investments, a sum which shall not be less than the aggregate amounts of the liabilities to the depositors. We quote herein-below para 6 of the said Directions, 1987. "6. Security for depositors.- On and from 15th May, 1987- (a) Every residuary non-banking company shall deposit and keep deposited in fixed deposits with public sector banks or invest and keep invested in unencumbered approved securities (such securities being valued at their market value for the time being), or in other investments, which in the opinion of the company are safe, a sum which shall not, at the close of business on 31st December, 1987, and, thereafter, at the end of each half year, that is, 30th June and 31st December, be less than the aggregate amounts of the liabilities to the depositors whether or not such amounts have become payable: Provided that the sum so deposited or invested- (a) not less than 10 per cent shall be in fixed deposits with any of the public sector banks; (b) not less than 70 per cent shall be in approved securities; and (c) not more than 20 per cent or ten times the net owned funds of the compa....
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....which such securities have not been drawn against or availed of." 11. The object behind issuance of para 6 is to protect the interests of the public who are investing in fixed deposits with the respondent herein. The object is to provide for sufficient capital so that there is no run on such institutions in future if they collapse. Under these Directions, the form of Return is prescribed. It has several parts. We are concerned with Part 5. On reading this Part, it is clear that investments are required to be made by the respondent herein and they are required to be shown in the returns which the respondent herein has to file before the Reserve Bank of India periodically. In this case, there is no dispute as to filing of the returns by the said respondent before the Reserve Bank of India. The point to be noted is that the Directions make it very clear that when respondent herein buys bonds and debentures of approved nature, they constitute investment and they cannot be treated as loans and advances. Therefore, interest on such investment cannot be taxed under the Interest Tax Act, 1974. 12. Before concluding, one aspect needs to be mentioned. One of the question raised by the Depa....