Case: Commnr. Of Income Tax, Kanpur Vs. M/S.Sahara India Savings&amp;Invest.Corp.Ltd

amount of deposits according to the terms of contract; (b) "approved securities" means, the securities in which the trustee is authorised to invest trust money by any law for the time being in force in India and bonds or fixed deposits issued by any corporation established or constituted under any Central or State enactments; (c) "public sector banks" means, the State Bank of India, the subsidiary banks and the corresponding new banks referred to in section 45(1) of the Reserve Bank of India Act, 1934 (2 of 1934); (d) "unencumbered approved securities" shall include the approved securities lodged by the company with another institution for advance or any other credit arrangements to the extent to which such securities have not been drawn against or availed of." 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. Before concluding, one aspect needs to be mentioned. One of the question raised by the Department before the Tribunal, though not specifically raised before us, was whether respondent herein was a "credit institution" as defined in section 2(5A) of the Interest Tax Act and, therefore, liable to be taxed under that Act in respect of the Assessment Year 1992-93? To answer the said question, we need to revisit section 2(5A) of the 1974 Act which defined "credit institution" to mean a banking company to which Banking Regulation Act, 1949 applies or a public financial institution as defined in section 4A of the Companies Act, 1956 or a State Financial Corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 or any other financial company. The words " any other financial company" have also been defined under the 1974 Act vide section 2(5B) to mean a company being a hire-purchase finance company or an investment company or a housing finance company or a loan company, or a mutual benefit finance company or a miscellaneous non-banking company. On a bare reading of sections 2(5A) and 2(5B), it is clear that a residuary non- banking company did not figure in section 2(5A) and 2(5B) of 1974 Act. Secondly, para 2 of the 1987 Directions indicates as to what is a residuary non-banking company. We quote herein-below para 2: "These directions shall apply to every residuary non-banking company, that is to say, a non-banking institution, being a company, which receives any deposit under any scheme or arrangement, by whatever name called, in one lump sum or in instalments by way of contributions or subscriptions or by sale of units or certificates or other instruments, or in any other manner and which, according to the definitions contained in the Non-Banking Financial Companies (Reserve Bank) Directions, 1977, or, as the case may be, the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977, is not- (i) an equipment leasing company; (ii) a hire purchase finance company; (iii) a housing finance company; (iv) an insurance company; (v) an investment company; (vi) a loan company; (vii) a mutual benefit financial company; and (viii) miscellaneous non-banking company" On reading para 2 of the 1987 Directions, it becomes clear that a residuary non-banking company is a company which receives deposits under any scheme or arrangement by way of contributions or subscriptions or by sale of units, certificates or other instruments or in any other manner and which, according to the definitions contained in the Non-Banking Financial Companies (Reserve Bank) Directions, 1977, or Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977, is not an equipment leasing company, a hire purchase finance company, a house finance company, an insurance company, an investment company, a loan company and a mutual benefit financial company. According to the Department, respondent herein fell under miscellaneous finance company in terms of section 2(5B)(vi) of the 1974 Act. According to the Department, this Finance Act, 1992 operated prospectively and that too w.e.f. 1.4.1993. According to the Department, during the Assessment Year 1992-93, respondent herein stood covered under sub-clause (vi) of section 2(5B). We find no merit in this argument of the Department. Under section 2(5B)(vi), in order to constitute a miscellaneous finance company, it has to be a company which carries on exclusively two or more classes of business referred to in the preceding sub-clauses (i) to (v). In other words, if there is a company which is investment company and also finance company, it can fall under section 2(5B)(vi). Therefore, a residuary non-banking company cannot fall within sub-clause (vi) as contended by the Department as the said sub-clause specifically says that a miscellaneous financial company should carry two or more classes of business referred to in the preceding sub-clauses. Moreover, unlike residuary non-banking companies, none of the companies mentioned in sub-clauses (i) to (v) are empowered to accept deposits. In the circumstances, sub-clause (vi) did not cover residuary non-banking companies prior to 1.4.1993. In the present case, it is not in dispute that after 1.4.1993, respondent herein has been filing its returns under the Interest Tax Act, 1974. For the afore-stat

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]It is the case of the Department, however, which needs to be addressed at this stage, that prior to 1.10.1991, the word "interest" in section 2(7) was defined so as to include any amount chargeable to income tax under the head "Interest on securities". It is the case of the Department that by an amendment w.e.f. 1.10.1991, the said item, namely, "amount chargeable to income tax under the head Interest on securities" stood deleted and, consequently, "interest on securities" would fall within the definition of the word "interest" under section 2(7). According to the Department, section 2(7) was not exhaustive and with the amendment w.e.f. 1.10.1991 when Interest on securities stood excluded, it (interest on securities) would automatically fall within the purview of the word interest under section 2(7) of the 1974 Act. We find no merit in this argument for two reasons. Firstly, as stated above, section 2(7), read as a whole, focuses only on interests accruing on loans and advances, commitment charges and discount on promissory notes and bills of exchange. It also specifically excludes interest under section 42(1B) of the Reserve Bank of India Act as well as discount on treasury bills. It was very easy for the Parliament to expressly provide for "interest on investments" to fall under section 2(7), but that has not been done. The reason is obvious. As stated above, one of the objects of enacting the 1974 Act is by way of any 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 likeg financial companies and residuaryg 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 "Residuaryg Companies (Reserve Bank) Directions, 1987. These Directions have been issued under sections 45J and 45K of the Reserve Bank of India Act, 1934On analysing section 45J, as it applies to the relevant period, read with section 45K, it is clear that the Reserve Bank of India insists ong institutions, which collect deposits, to provide for information in specified forms in relation to receipt of deposits including rates of interest payable byg institutions on such deposits as well as the period for which the deposits may be received. Under section 45K(4), if anyg institution fails to comply with any of the directions given by the Bank, the Reserve Bank may even prohibit the acceptance of deposits by thatg institution. These stringent provisions are made in the Reserve Bank of India Act for a reason that companies like respondent herein receives deposits from the public. To safeguard their interests, the Reserve Bank, as a Regulator, insists that every company, including respondent herein which is a nonbanking institution, has to submit its returns in the prescribed form every year and it is in that light that the Reserve Bank of India has specifically issued what is called as Residuaryg Companies (Reserve Bank) Directions, 1987Before concluding, one aspect needs to be mentioned. One of the question raised by the Department before the Tribunal, though not specifically raised before us, was whether respondent herein was a "credit institution" as defined in section 2(5A) of the Interest Tax Act and, therefore, liable to be taxed under that Act in respect of the Assessment Year? To answer the said question, we need to revisit section 2(5A) of the 1974 Act which defined "credit institution" to mean a banking company to which Banking Regulation Act, 1949 applies or a public financial institution as defined in section 4A of the Companies Act, 1956 or a State Financial Corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 or any other financial companyOn reading para 2 of the 1987 Directions, it becomes clear that a residuaryg company is a company which receives deposits under any scheme or arrangement by way of contributions or subscriptions or by sale of units, certificates or other instruments or in any other manner and which, according to the definitions contained in theg Financial Companies (Reserve Bank) Directions, 1977, or Miscellaneousg Companies (Reserve Bank) Directions, 1977, is not an equipment leasing company, a hire purchase finance company, a house finance company, an insurance company, an investment company, a loan company and a mutual benefit financial company. According to the Department, respondent herein fell under miscellaneous finance company in terms of section 2(5B)(vi) of the 1974 Act. According to the Department, this Finance Act, 1992 operated prospectively and that too w.e.f. 1.4.1993. According to the Department, during the Assessment Year, respondent herein stood covered undere (vi) of section 2(5B). We find no merit in this argument of the Department. Under section 2(5B)(vi), in order to constitute a miscellaneous finance company, it has to be a company which carries on exclusively two or more classes of business referred to in the precedings (i) to (v). In other words, if there is a company which is investment company and also finance company, it can fall under section 2(5B)(vi). Therefore, a residuaryg company cannot fall withine (vi) as contended by the Department as the saide specifically says that a miscellaneous financial company should carry two or more classes of business referred to in the preceding. Moreover, unlike residuaryg companies, none of the companies mentioned ins (i) to (v) are empowered to accept deposits. In the circumstances,e (vi) did not cover residuaryg companies prior to 1.4.1993. In the present case, it is not in dispute that after 1.4.1993, respondent herein has been filing its returns under the Interest Tax Act, 1974.