ORDER
K.K. Boliya, Accountant Member
1. This appeal has been filed by the assessee against the order dated 24.9.96 of CIT(A)-XVI, Mumbai. The first ground of appeal pertains to confirmation by the CIT(A) of levy of interest tax on the interest received on Bonds and Debentures amounting to Rs. 9,63,354/-.
2. The ld. counsel appearing for the assessee submitted that this issue is covered in assessee’s favour by the ITAT, Mumbai decision in the case of Life Insurance Corporation of India v. JCIT -82 ITD 748. The ld. counsel also relied on the Madras High Court decision in the case of CIT v. Laxmi Vilas Bank Pvt. Ltd. – 228 ITR 697. The ld. DR was fair enough to concede that the issue is covered as mentioned above. Accordingly and respectfully following the precedents, we hold that interest tax is not leviable on interest received on Bonds and Debentures. The AO is directed to give necessary relief to the assessee.
3. The ground No. 2 is as under:
“On the facts and circumstances of the case and in law, the CIT(A) erred in upholding the action of the DCIT in charging interest tax on interest of Rs. 5,96,921/-.”
4. It appears that there is some discrepancy in the quantum of interest which is claimed to be at Rs. 5,96,921/-, whereas in the order of the CIT(A), the quantum is mentioned to be Rs. 4,47,343/-. The ld. counsel appearing for the assessee explained that the assessee received interest on inter-corporate deposits amounting to Rs. 14,47,290/-, the break-up of which is as under:
a) Interest received up to 30.9.91 Rs. 8,50,369/-
b) Interest received from 1.10.91 Rs. 4,47,353/-
c) Interest on interest pertaining to the period up to 30.9.91 Rs. 1,49,568/-
Rs. 14,47,290/-
The relevant facts are that in the assessment order passed by the AO Under Section 8(2) of the Interest Tax Act, the aforesaid interest of Rs. 14,47,290/- was included in the computation of chargeable interest. The assessee had claimed that the aforesaid interest was earned on inter-corporate deposits and therefore it was beyond the purview of charge of interest tax. The AO did not indicate any reasons for rejecting the claim. The ld. CIT(A) has dealt with this issue at para 3 and 3.1 of his order, which may be reproduced below:
“Ground No. 2 is against charging interest tax Act on interest of Rs. 14,47,290/- being inter-corporate deposits. The appellant has pressed the same arguments as advanced in the case of interest on debentures and bonds. For the reasons given above, it is held that the interest on inter-corporate deposits represent interest on loans and advances and accordingly the provisions of Section 2(7) of the Interest Tax Act, 1974 applied to such interest. The appellant has also raised an alternative plea that interest received up to 30.9.91 amounting to Rs. 8,50,369/- ought to have been excluded from the chargeable interest in view of the fact that the amendment to the Act was effective from 1.10.91.
I am inclined to agree with the counsel for the appellant that in so far as the interest received up to 30.9.91 is concerned, the same is to be excluded from the charging of interest tax. The AO is directed to verify and modify the same accordingly.”
From the above, it is seen that the ld. CIT(A) held that interest on inter-corporate deposits is in the same nature as interest on loans and advances. However, the alternative claim of the assessee was accepted that interest received up to 30.9.91 should be excluded. He directed the AO to verify and modify the assessment accordingly.
5. In the background of the abovementioned facts, the ld. counsel appearing on behalf of the assessee submitted that the definition of ‘Interest’ has been provided Under Section 2(7) of the Interest Tax Act, which is reproduced below:
” ‘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.”
The ld. counsel argued that for the purposes of Interest Tax Act, the interest on loans and advances is includible in the chargeable interest. It is pointed out that inter-corporate deposits are not covered in the definition and therefore interest tax cannot be levied on interest received on such deposits. It is submitted that a deposit cannot be equated with loan and both have distinct features and characteristics. It is argued that charging section has to be strictly construed and only interest on loans and advances can be included in chargeable interest. The ld. counsel has placed strong reliance on the following judgments:
i. Pennwalt (India) Ltd. v. Registrar of Companies – 62 Company Cases 112 (Bom.)
ii. Durga Prasad Mandelia v. Registrar of Companies – 61 Company Cases 480 (Bom.)
iii. A.M. Shamsudeen v. Union of India – 244 ITR 266 (Mad.)
iv. Vaidyanath Plastic Industries Pvt. Ltd. v. ITO – 230 ITR 522 (Del.)
The ld. counsel has invited our attention to the ratio of the case of Pennwalt (India) Ltd. (supra), which is reproduced below from the headnote:
“Held, allowing the petition, that there was a distinction between a loan and a deposit for the purpose of the Companies Act, 1956, and in the absence of anything to hold that the deposits made by the appellant company with well known independent 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.
The dividing line between a loan and deposit is undoubtedly thin; the two, however, are not synonymous.
Section 58A and 227(1A)(d) indicate that it may not be possible to interchange the terms ‘loan’ and ‘deposit’ under the Companies Act unless there is an express provision to that effect or the context makes it clear that the terms are interchangeable.
It is true that both in the case of a loan and in the case of a deposit, there is a relationship of a debtor and a creditor between the party giving money and the party receiving money. But, in the case of a deposit, the delivery of money is usually at the instance of the giver and it is for the benefit of the person who deposits the money – the benefit normally being earning of interest from a party who customarily accepts deposits. Deposits could also be for safekeeping or as a security for the performance of an obligation undertaken by the depositor. In the case of a loan, however, it is the borrower at whose instance and for whose needs the money is advanced. The borrowing is primarily for the benefit of the borrower although the person who lends the money may also stand to gain thereby by earning interest on the amount lent. Ordinarily, though not always, in the case of a deposit, it is the depositor who is the prime mover while in the case of a loan, it is the borrower who is the prime mover. The other and more important distinction is in relation to the obligation to return the amount so received. In the case of a deposit which is payable on demand, the deposit would become payable when a demand is made. In the case of a loan, however, the obligation to repay the amount arises immediately on receipt of the loan. It is possible that in case of deposits, which are for a fixed period or loans which are for a fixed period, the point of repayment may arise in a different manner. But, by and large, the transaction of a loan and the transaction of making a deposit are not always considered identical.
‘Loan’ and ‘deposit’ are not identical in meaning and cannot always be interchanged. Some loans may be deposits and some deposits may be loans. But all loans are not deposits or vice versa.
The fact that both transactions create the relationship of a debtor and a creditor is not enough to equate a loan with a deposit. Nor would it be correct to make a distinction between the two only for the purpose of calculating the period of limitation. The nature of the two are somewhat different and that is the reason why a distinction is made between the two for the purpose of calculating the period of limitation. If the two transactions were identical, there would be no need to prescribe different periods of limitation.”
The ld. counsel submitted that similar view has been taken by the Bombay High Court in the case of Durga Prasad Mandelia (supra). The cases of A.M. Shamsudeen and Vaidyanath Plastic Industries Ltd. (supra) arose Under Section 269T of the IT Act and for the purposes of that section, it was held that deposits are different from loans.
6. The ld. DR supported the orders of the Revenue authorities and submitted that the definition of ‘interest’ contained Under Section 2(7) is inclusive definition. As per this definition, ‘interest’ means interest on loans and advances and also includes some other receipts as mentioned thereunder. It is argued that the term ‘loan’ and ‘advance’ is very clear and unambiguous and there is no question of beneficial interpretation in assessee’s favour when the provisions of law are clear. For this proposition, he has relied on the Karnataka High Court decision in the case of Mysore Silk Industries Ltd. The ld. DR submitted that the cases decided by the Bombay High Court and relied upon by the ld. counsel for the assessee arose under the relevant provisions of the Companies Act, 1956 and therefore have no relevance for the purpose of the Interest Tax Act. It is submitted that the provisions are materially different. It is submitted similarly that the cases which arose Under Section 269SS or 269T cannot be applied to the provisions of the Interest Tax Act.
7. In his rejoinder, the counsel for the assessee submitted that the Karnataka High Court decision in the case of Mysore Silk Industries Ltd. (supra) is not applicable as the observations of the High Court were in connection with the amendment introduced. It is submitted that in the present case, the charging section has to be interpreted and unless there is clear mandate, interest tax cannot be levied.
8. We have given a careful consideration to the rival submissions vis-a-vis the relevant facts and have also gone through the precedents cited as also the provisions of law. First of all, the applicability of the Bombay High Court decisions relied upon by the ld. counsel for the assessee may be considered. In the case of Pennwalt (India) Ltd., the Hon’ble Bombay High Court was concerned about the provisions of Section 270, Section 58A and Section 227(1A)(d) of the Companies Act. Section 370(1) of the Companies Act, 1956 reads as under:
“370 (1) No company hereinafter in this section referred to as the ‘lending company’ shall –
(a) make any loan to, or … any body corporate, unless the making of such loan, the giving of such guarantee or the provision of such security has been previously authorized by a special resolution of the lending company….
Provided further that the aggregate of the loans made to all bodies corporate shall not exceed without the prior approval of the Central Government –
(a) thirty per cent of the aggregate of the subscribed capital of the lending company and its free reserves where all such other bodies corporate are not under the same management as the lending company.”
If the provisions of Section 370(1) are contravened by a person, under Section 371(1), such person shall be punishable with fine or with simple imprisonment up to a period of six months. Thus, the consequences of contravention of Section 370(1) are penal and stringent. The Hon’ble Bombay High Court referred to Section 58A of the Companies Act and observed that Section 58A deals with deposits and under the Explanation, the term ‘deposit’ has been defined as under:
“For the purposes of this section ‘deposit’ means any deposit of money with, and includes any amount borrowed by, a company but shall not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.”
In view of the provisions of the Companies Act, the Hon’ble Bombay High Court held that under that Act, there is a clear distinction between the term ‘loan’ and ‘deposit’. Section 370(1) only refers to ‘loan’ and it was held by the High Court that the term ‘loan’ as appearing in Section 370(1) will not include a ‘deposit’. It should also be kept in view that the Hon’ble Bombay High Court was concerned about the consequences of contravention of Section 370 of the Companies Act and therefore the provisions had to be construed very strictly. It is significant that the term ‘advance’ has neither been considered nor dealt with by the Hon’ble Bombay High Court in the above cases. In view of the specific provisions of Section 58A and 227(1A)(d) of the Companies Act, it was held by the High court that it may not be possible to interchange the terms ‘loan’ and ‘deposit’ under the Companies Act, unless there is an express provision to that effect or the context makes it clear that the terms are interchangeable. It may be mentioned that the Section 227(1A)(d) also makes a distinction between a ‘loan’ and a ‘deposit’. It has also been observed by the High Court that some ‘loans’ may be ‘deposits’ and some ‘deposits’ may be ‘loans’, but all ‘loans’ are not ‘deposits’ or vice versa. The ratio of the case of Durga Prasad Mandelia is also more or less on the same lines. In that case, it was observed that the word ‘loan’ is a ‘generic’ term and includes a ‘deposit’. In our view, while interpreting Section 2(7) of the Interest Tax Act, the ratio of the Bombay High Court decisions cannot be applied and the ambit and scope of the term ‘interest’ has to be independently determined. Similar would be the position with regard to the cases which arose Under Section 269SS or Section 269T of the IT Act.
9. The definition of the word ‘interest’, as contained Under Section 2(7), has been already reproduced above. For the purposes of the Interest Tax Act, ‘interest’ means interest on loans and advances made in India. The definition further goes to say that it includes certain items, but, does not include certain other items. There is no other provision in the Interest Tax Act which refers to ‘deposit’ in contra-distinction to ‘loan’ 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 has 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 finalized 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 Tax Act, which grants exemption in respect of interest on inter-corporate deposits. Considering the entire facts and circumstances and the provisions of law, we hold that interest tax is leviable on the interest income earned by the assessee company from inter-corporate deposits. The CIT(A) has already directed the AO to exclude interest for the period up to 30.9.91. Therefore, on this issue, the finding of the ld. CIT(A) is confirmed.
10. The last ground of appeal is as under:
“On the facts and circumstances of the case and in law, the appellant submits that Section 26C of the Interest Tax Act gives power to the credit institutions to vary the rate of interest so as to include the interest tax and the interest tax has been levied on the gross interest received and accordingly as per the principles of diversion of income by over-riding title, the interest tax liability ought to have been computed at 3/103 of the amount of interest received and not 3/100 of the interest received.”
11. The ld. counsel for the assessee submitted that this issue is covered in assessee’s favour by the ITAT, Pune Bench order dated 3.8.2000 in the case of United Western Bank Ltd. in Interest Tax Appeal No. 13 and 14/Pn/96. A copy of the order has been filed. It is submitted that it is purely a legal issue, but, inadvertently no such ground of appeal was raised before the CIT(A) and therefore there is no finding by the ld. CIT(A) on this issue. The ld. DR opposed the prayer of the assessee’s counsel on the ground that no such ground was raised before the CIT(A).
12. After considering the facts and circumstances, we feel that the issue is purely a legal issue and in the interest of justice, the ground raised before the Tribunal should be admitted even though no such issue was raised before the CIT(A). In view of the abovementioned facts, we deem it proper to restore this issue to the file of the CIT(A) to be dealt with and decided after allowing opportunity to both the parties and also after considering the Pune Bench decision in the case of United Western Bank Ltd. (supra).
13. In the result, the assessee’s appeal stands partly allowed.