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

FACTS :2.The petitioner is a company incorporated under the Companies Act, 1956. It was promoted by RBI, ICICI, UTI, SBI, IDBI etc. It is an investment company as defined under sectionof the Interest Tax Act, 1974, as it then stood. The petitioner is a dealer in money market instruments such as call/ notice/term money, treasury bills, commercial paper, certificate of deposit and Government Dated Securities. The Government Dated Securities Market has two segments viz. Primary market and secondary market. The primary market consists of issuers and subscribers. The issuers are Central and State Government. The secondary market includes Banks, Financial Institutions, Insurance Companies, Provident Funds, Trusts, individuals, Primary dealers etc. The petitioner is a primary dealer in dated Government Securities. The petitioner subscribes to, buys stocks and trades in dated Government Securities regularly. At the end of the year the petitioner shows the Dated Government securities in its accounts under the Head Current Assets" asThe profits on sale of Dated Government Securities as well as the interest earned on Dated Government Securities are shown as business income and are assessed under theAct, 1961.On 1st August, 1974, the Interest Tax Act came into force for the first time. It remained in force upto 28th February, 1978. It was revived from 1st July, 1980. It continued upto 31st March, 1985. Thereafter, from 1st April, 1985 upto 1st October, 1991, it was withdrawn. However, with effect from 1st October, 1991, the Act 1974 was once again revived and it continued upto 31st March, 2000.As stated above, the petitioner is an Investment Company. As an Investment Company, it came within the ambit of the expression "Financial Company" as defined under sectionand as a Financial Company it came with the ambit of Credit Institution as defined under sectionAs a Credit Institution, the petitioner filed its return of Chargeable Interest for the year ending 31st March, 1994 relevant to the assessment yearThe return was filed on 5th December, 1994 returning a total chargeable interest at Rs. 24.83 lakhs (approximately). The said interest included interest on Rs. 15.69 lakhs received from RBI during the financial yearon dated Government securities directly subscribed by the petitioner at the time of its initial issue by the Government. The assessment was completed under section 8(2) of the Act vide order dated 7th March, 1997 accepting the Return of Chargeable Interest, after scrutiny. However, the petitioner came across a Circular issued by RBI under which it was clarified that interest earned on Government Securities does not amount to Interest within the meaning of section 2(7) of the Interest Tax Act. In view of the said Circular (Exhibit I to the petition), the petitioner filed a revision petition on 22nd July, 1997 under section 20 of the Interest Tax Act, 1974 contending that the dated Government Securities held by the petitioner did not represent monies lent to the Government and, therefore, interest earned on such dated Government Securities was not in the nature of Interest on Loans and thus such interest was not chargeable to tax under section 4 of the Interest Tax Act 1974. By order dated 28th February, 2002, the revisional authority rejected the revision on the ground that the new claim cannot be considered for the first time under section 20. It was also rejected on merits. The revisional authority took the view that the word "interest" is defined under section 2(7) to mean interest on loans and advances. That the expression "loans and advances" included interest on dated Government Securities. Accordingly, the revision petition filed by the assessee came to be rejected. Being aggrieved, the present petition is filed.

Court's reasoning:
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.