Case: Discount &amp; Finance House of India Limited Vs. S.K. Bhardwaj &amp; Others

1991 which came into force from 1st October, 1991 that exclusionary Clause, which excluded interest on Government Securities, was deleted and therefore, the legislature intended to charge and levy interest tax on interest received from R.B.I. on dated Government Securities. We do not find any merit in this argument. In the case of C.I.T. v. Madurai Mills Co. Ltd., reported in 89 I.T.R. 45, a similar argument was advanced by the department. In that matter, the question which arose before the Supreme Court was whether capital gains stood attracted on distribution of assets of the companies in liquidation. It was held by the Supreme Court that distribution of assets of the companies in liquidation did not amount to transfer under section 12-B(1) of the Income Tax Act, 1922. One of the arguments advanced on behalf of the department was that prior to Finance No. 3 Act of 1956, there was a proviso in section 12B(1) of the Income Tax Act, 1922 which excluded such distribution of assets from the word "transfer" in section 12-B(1) of the Act. It was argued that after Finance No. 3 Act of 1956 that proviso was deleted and, therefore, the Parliament intended to levy tax on distribution of assets of the companies in liquidation. This argument was rejected by the Supreme Court. The Supreme Court held that the proviso to section 12-B (1) was introduced by the Parliament by way of abundant caution. It was clarificatory in nature. That, the main section 12-B(1) itself contemplated exclusion of capital gains from distribution of assets of the companies in liquidation and, therefore, deletion of the proviso had no effect on the main section 12-B(1). This judgment of the Supreme Court in Madurai Mills case (supra) squarely applies to the facts of the present case.In the present case, if one construes section 2(7) in the context of the object of the Act and the scheme of the Act, it is clear that the main section 2(7) applies only to loans and advances and not to the gross amount of interest received from R.B.I. on dated Government Securities and that deletion of the exclusionary clause by Finance Act of 1991 had no effect on section 2(7) as the exclusionary clause was only clarificatory in nature. Therefore, there is no merit in the argument advanced on behalf of the department. Moreover, section 2 is a definition section. It starts by the expression "In this Act, unless the context otherwise requires". Section 2(7) forms part of definition section. It defines the word "interest" to mean interest on loans and advances. Section 2(7) must be read with the expression "unless the context otherwise requires". Section 26-C provides evidence of the expression "unless the context otherwise requires". Therefore, section 26-C demolishes the argument of the department that the word "interest" means interest on Dated Government Securities. One has to read section 2(7) with section 26-C and, if so read, interest received from R.B.I. on Dated Government Securities will not fall within the meaning of the expression "interest on loans and advances" under section 2(7) of the Act. Accordingly, we hold that the department was not entitled to levy interest tax on Rs. 15,69,41,050 /- received from R.B.I. during the year 1993-94 on dated Government Securities as it would mean levy of tax indirectly on R.B.I. under section 26-C of the Act.6.One of the incidental points, which remains for consideration in this case is : Whether the Commissioner of Income Tax (Revisional Authority under section 20 of the Interest Tax Act) was right in rejecting the review application of the petitioner on the ground of non-maintainability. Under the impugned order, it has been held by the revisional authority that under section 20 of the Act, the revisional authority cannot allow the assessee to raise a claim for the first time, particularly when the assessee has offered the said amount of Rs. 15,69,41,050/- to tax. This finding of the revisional authority, in our view, is erroneous. In this case, the assessee has raised a question, which goes to the root of the matter. The point at issue before the revisional authority was not concerning a legality of the order of the A.O., but it was concerning lack of authority/jurisdiction. In our view, interest tax was not leviable on the interest received from R.B.I. on Dated Government Securities and consequently, the issue raised concerns lack of authority/ jurisdiction on the part of the A.O. under the Interest Tax Act to levy tax on such interest. Therefore, such an issue was entertainable under section 20 of the Interest Tax Act.7.Before concluding, we want to clarify one point. Petitioner subscribes to Dated Government Securities of R.B.I. It receives from R.B.I. half yearly interest on the coupon dates every year. The interest is paid twice in a year on the holding of the petitioner in the S.G.L. account with R.B.I. Our judgment applies only to the interest paid by R.B.I. to the petitioner on its holding the Dated Government Securities in the S.G.L. account with R.B.I. This clarification is required to be made because the petitioner also deals with dated Government Securities after subscribing to the same. In other words, after subscribing, the petitioner also sells Dated Government Securities under which activity, they earn interest as also profits which are shown as business income under the Income Tax Act. Our judgment, therefore, does not touch the interest received by the petitioner on sale of Dated Government Securities after they are subscribed to. It may be noted that, in this case, we are only concerned with interest received from R.B.I. by the petitioner on the Dated Government Securities held by it on the coupon date. Our judgment is not concerned with the interest earned on dated Government Securities which are traded by the petitioner with other institutions thereafter. Therefore, we have confined our judgment only to the amount of Rs. 15,69,41,050/- which the petitioner has received from R.B.I. as gross interest on dated Government Securities directly subscribed by the petitioner.

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

Explanation:
1[ds]We are, therefore, required to examine the Act in the context of this argument. The Act came into force with effect fromIt continued to operate upto 31st March, 1978. It was dropped from0. It was revived from5. It was once again dropped from1. It was reintroduced with effect fromvide Finance No. 2 Act, 1991 and it continued to operate uptoThereafter, it has been dropped again. One has to ask a question as to why the Act has been operating intermittently. The object of the Act was to discourage borrowings by increasing the cost of borrowings. This was in 1974. The other object was to increase the revenue. During the period2, interest rates in India were administered centrally. However, afterinterest rates have been freed and they are fixed by market forces of demand and supply. After 1992, one of the biggest market borrowers is the Government. Therefore, the Act has been operating intermittently depending upon the economy of thethe present case, if one construes section 2(7) in the context of the object of the Act and the scheme of the Act, it is clear that the main section 2(7) applies only to loans and advances and not to the gross amount of interest received from R.B.I. on dated Government Securities and that deletion of the exclusionary clause by Finance Act of 1991 had no effect on section 2(7) as the exclusionary clause was only clarificatory in nature. Therefore, there is no merit in the argument advanced on behalf of the department. Moreover, section 2 is a definition section. It starts by the expression "In this Act, unless the context otherwise requires". Section 2(7) forms part of definition section. It defines the word "interest" to mean interest on loans and advances. Section 2(7) must be read with the expression "unless the context otherwise requires". Sectionprovides evidence of the expression "unless the context otherwise requires". Therefore, sectiondemolishes the argument of the department that the word "interest" means interest on Dated Government Securities. One has to read section 2(7) with sectionand, if so read, interest received from R.B.I. on Dated Government Securities will not fall within the meaning of the expression "interest on loans and advances" under section 2(7) of the Act. Accordingly, we hold that the department was not entitled to levy interest tax on Rs. 15,69,41,050 /received from R.B.I. during the yearon dated Government Securities as it would mean levy of tax indirectly on R.B.I. under sectionder the impugned order, it has been held by the revisional authority that under section 20 of the Act, the revisional authority cannot allow the assessee to raise a claim for the first time, particularly when the assessee has offered the said amount of Rs. 15,69,41,050/to tax. This finding of the revisional authority, in our view, is erroneous. In this case, the assessee has raised a question, which goes to the root of the matter. The point at issue before the revisional authority was not concerning a legality of the order of the A.O., but it was concerning lack of authority/jurisdiction. In our view, interest tax was not leviable on the interest received from R.B.I. on Dated Government Securities and consequently, the issue raised concerns lack of authority/ jurisdiction on the part of the A.O. under the Interest Tax Act to levy tax on such interest. Therefore, such an issue was entertainable under section 20 of the Interest Tax Act.7.Before concluding, we want to clarify one point. Petitioner subscribes to Dated Government Securities of R.B.I. It receives from R.B.I. half yearly interest on the coupon dates every year. The interest is paid twice in a year on the holding of the petitioner in the S.G.L. account with R.B.I. Our judgment applies only to the interest paid by R.B.I. to the petitioner on its holding the Dated Government Securities in the S.G.L. account with R.B.I. This clarification is required to be made because the petitioner also deals with dated Government Securities after subscribing to the same. In other words, after subscribing, the petitioner also sells Dated Government Securities under which activity, they earn interest as also profits which are shown as business income under the Income Tax Act. Our judgment, therefore, does not touch the interest received by the petitioner on sale of Dated Government Securities after they are subscribed to. It may be noted that, in this case, we are only concerned with interest received from R.B.I. by the petitioner on the Dated Government Securities held by it on the coupon date. Our judgment is not concerned with the interest earned on dated Government Securities which are traded by the petitioner with other institutions thereafter. Therefore, we have confined our judgment only to the amount of Rs. 15,69,41,050/which the petitioner has received from R.B.I. as gross interest on dated Government Securities directly subscribed by the petitioner.