TaxTMI 
TaxTMI 
2005 (11) TMI 167
X X X X Extracts X X X X
X X X X Extracts X X X X
....to give intercorporate deposits and making investments in shares of other companies, the assessee-company is covered by sub-sections (ii) and (iv) of the section 2(5B) of the Interest-tax Act, 1974." 3. The CIT(A) agreed with the assessments by observing in paragraph 2.3 of his order as under:- "2.3 I have carefully considered the observation made by the Assessing Officer in the assessment order, the detailed submission as advanced by the counsel of the appellant along with the case laws and I am of the opinion that the Assessing Officer is fully justified in observing that the main business of the appellant-company is to give loans and advances, bill discounting, investments, equity participation, etc. especially when the memorandum of association of the appellant-company itself narrates such activities i.e., to carry on all kinds of financial operations including long-term, short-term loans and capital, bridge loans, working capital, bill discounting, bill purchasing and deferred payment, equity participation, preferential capital bonds, giving of guarantees, counter guarantees, indemnities and sureties etc. The case laws as relied upon by the appellant's counsel ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng on or after 1-4-1975, a tax (in this Act referred to as interest-tax) in respect of its chargeable interest of the previous year at the rate of seven per cent of such chargeable interest." 6. The term "interest" is defined in section 2(7) of the said Act as under:- "(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 of 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." 7. The interest received by the assessee is interest from intercorporate deposit. These inter-corporate deposits are governed by section 58A of the Companies invested through issue of prospectus required under the Companies Act. To assess a person under this Act, we have to examine whether the interest is received by the assessee on the loans and advances and in that context, we have to understand what a loan and a deposit means. The terms "dep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....creates a debt it does not necessarily involve a contract of loan. The question whether a deposit amounts to a loan depends upon the terms of the contract under which the deposit is made. AIR 1962 SC 1764. Ref. to. When a person deposits foreign currency in the current account of a bank in order to draw it whenever necessary for the purpose for which it was given, it cannot be said that he enters into a contract of loan with the bank within the meaning of section 4(1) of the Act. He only deposits the money for the said purpose, such deposit is not a loan, the person cannot be held to have contravened section 4(1) of the Act." 11. The Madras High Court in the case of Abdul Hamid Sahib v. Rahmat Bi AIR 1965 Mad. 427 also considered the definition between loan and deposit as under:- "The terms 'loans' and 'deposits' are not mutually exclusive terms. There are a number of common features between the two. In a sense a deposit is also a loan with this difference that it is a loan with something more. Both are debts repayable. But, the question as to when the repayment is to be made furnishes the real point of distinction between the two concepts. A lo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... companies were in fact loans or amounts lent by the appellant-company and borrowed by those companies, they had to be considered as deposits for the purposes of section 370. Section 371 laid down penal consequences for failure to comply with the provisions of section 370. Since non-compliance involved penal consequences, section 370 could not be given an interpretation wider than that warranted by the actual words used therein. Without any provision to that effect, the word 'loan' as used in section 370 could not be given a wider interpretation so as to include deposits." 14. Similar was the observation of Madras High Court in the case of A.M. Shamsudeen wherein it was held as under:- "Held that, in the instant case, the Commissioner as well as the Deputy Commissioner had accepted the fact that the assessee-firm had repaid the loan in cash. Further, the Deputy Commissioner had also accepted that the assessee-firm had borrowed certain sums of money which were regarded as loan transactions. It was not possible to enlarge the scope of the term "deposit" in section 269T of the Act to include the transaction of the loan. Therefore, the allegation that there was a vi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ern Bank Ltd. [2003] 259 ITR 312 the Bombay High Court held that the Interest-tax Act applies strictly to loans and advances and not to investment and, therefore, this Act would not apply to interest by an assessee-bank on securities/debentures held by the assessee under the category "Permanent". In this case also, the contention of the Revenue was that prior to amendment the word "interest" in section 2(7) of the Act excluded by an express provision interest on securities and when it was re-introduced then the Legislature deleted the exclusionary clause from section 2(7) which indicated the intention of the Legislature to tax interest on securities and that there is no difference between the investment and loan and when a bank subscribes to Government securities, it gives a loan to the Government although the balance sheet it is shown as investment. In that context, the Bombay High Court held that the difference between the "loan" and "investment" is well-known in a commercial sense, accounting sense and also under the Companies Act (see sections 370 and 372). It is also borne out by section 13(1)(d) and section 11(5) of the Act. It also borne out by section 2(28A) of the Income-t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct. When a person deposits money in a bank, a debtor-creditor relationship is created, but the transaction cannot be regarded as a loan and simply because a debtor-creditor relationship is created, it cannot be regarded as a loan transaction. It was further observed that when the term "means" is used while defining an expression, it gives a hard-and-fast meaning of the expression defined. Thus, the term "interest" means interest only on the loan segment of the investment and leaves out other segments of investments. The Tribunal held that the term "advance" has many meanings but for our purpose, it only means advances which are in the nature of loan. In paragraph 46, the Tribunal observed as under:- "44. In the light of the above discussion, let us consider the definition of the term "interest" given in the Interest-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 inc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9;loans'. While the case of the assessee is that 'loans' and 'deposits' are different expressions having different meanings and, therefore, interest on deposits is not chargeable to tax. Our study reveals that 'loans' and 'deposits' are not mutually exclusive terms inasmuch as (i) both are debts repayable; (ii) in both the cases, money passes from one hand to another; (iii) in both the cases, there is relationship of debtor and creditor; (iv) there is a liability to return the money depending upon the terms and conditions between the parties. "Still there is fine distinction between the two. In the case of deposit, it is made at the instance of the depositor whereas a loan is given at the instance of the borrower for his use with or without compensation. Consequently, a deposit is repayable only on demand by the depositor without the debtor having to seek out the creditor, while in the case of a loan, the obligation to repay is forthwith incur (though the obligation may have to g be discharged in future) and the borrower must seek out the lender to repay the loan. Even the Legislature has made distinction between these two terms. Limitation Act p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9; or 'advance'. Interest on 'deposit' is not specifically excluded from the definition under section 2(7). Interest on loans as well as advance is chargeable to interest tax. The word 'advance' has wide connotations and it means any money advanced to any person. In the present case, the assessee-company had advanced moneys by way of interest earning deposits, to other companies for a fixed term on which interest income is earned. Such deposits have not been made in response to any invitation to make such deposits by the other companies. The transactions have been finalised through brokers. The object and purpose of Interest-tax Act is to levy tax on interest income earned on loans and advances. Even the Bombay High Court has observed that in certain circumstances 'loan' may include a 'deposit' and a 'deposit' may include a loan. It has also been observed that the term 'loan' is a 'generic' term which includes a 'deposit' also. Further, the scope of the definition under section 2(7) is also enlarged as it includes interest not only on loans, but also on advances. There is no specific provision in the Interest-t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....As observed by the Madras High Court and the Privy Council decisions aforesaid, the advances may in certain circumstances be loan but not necessarily always. Ordinarily an advance is a payment beforehand and it does not connote the idea of repayment. It is adjusted when the action for which the money is advanced is completed and if not repaid on expiry of the loan like a deposit. The company is not bound to accept the deposit made, if proceeding on the basis of the prospectus a person interested to make a deposit. By issuing prospectus the company invites offer for making deposit and that is not offer to receive deposit whereas in case of loan the assessee prays for a loan. It offers to borrow money and once that offer is accepted, the lender is bound to give money to the borrower on terms settled. 27. It is also to be noticed that a taxing statute has to be strictly construed and the subject cannot be taxed unless comes within the letter of the law. The argument that a particular income falls within the spirit of the law cannot be availed of by the Revenue. It is a trite law that no tax can be imposed on the subject without the words in the Act. No tax can be imposed by inferen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by considering what was the substance of the matter." 29. Where the language of a provision is plain, courts cannot ordinarily concern themselves with the policy behind the provision, or the intention of the Legislature. As Lord Watson said in A. Salomon v. A. Salomon and Co. [1897] AC 22, 38 (HL) "'intention of the Legislature' is a common but slippery phrase". In ITO v. T.S. Devinatha Nadar [1968] 68 ITR 252; AIR 1968 SC 623, the Supreme Court of India observed that: "we must look to the general scope and purview of the statute, and at the remedy sought to be applied, and consider what was the former state of the law, and what it was that the Legislature contemplated" was made while construing a non-taxing statute. The said rule had only a limited application in interpreting a taxing statute. It follows from this decision that the mischief rule laid down in Heydon's case [1584] 3 Co. Rep. 7 has only a limited applicatio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....words 'means' and 'includes' such definition is to be given a wider meaning and is not exhaustive or restricted to the items contained or included in such definition. Thus the meaning of 'agricultural produce' in the above definition is not restricted to any products of agriculture as specified in the Schedule but also includes such items which come into being in processed form and further includes such items which are called as gur, rab, shakkar, khandsari and jaggery." 34. On the strength of the observation made in paragraph 12 of the above judgment, Sri Agarwal contended that the word "interest" in section 2(7) should be deemed to include its natural meaning and should not be limited to interest on loans and advances. We do not agree. 35. Firstly, all that has been held by the Supreme Court in the case of Krishi Utpadan Mandi Samiti [1993] Supp. 3 SCC 361 (II) is that agricultural produce in section 2(a) of the U.P. Krishi Utpadan Mandi Adhiniyam will not only include the items mentioned in that provision but also such items in the processed form. This decision does not mean that the expression "agricultural produce" can be given its natural meaning....