Commissioner of Income Tax-I vs Bank of Madura Limited

P.D. Dinakaran, J.—1. The revenue is the appellant in these appeals. The relevant assessment years are 1993-94 and 1994-95. The respondent/assessee filed its interest tax return and the assessing officer, inter alia assessed the interest received by the assessee out of securities, debentures, bonds, etc. to tax.

1.2. Aggrieved by the said order of the assessing officer, the assessee filed appeals to the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals), by order dated 20.11.1996 made in I.T.A . Nos. 11 and 12/1996-97, allowed the appeals preferred by the respondent/assessee.

1.3. The appellant/revenue preferred appeals before the Tribunal. The Tribunal, by order dated 10.2.2004, dismissed the appeals, viz., I.T.A . Nos. 7 and 8/Mds/1997, preferred by the appellant/ revenue. Hence, these appeals.

The following question of law was formulated for our consideration:

"Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the interest received out of the Securities, debentures, bonds, etc., were not liable to be taxed under the Interest Tax Act?"

The Interest-tax Act was enacted as an anti-inflationary measure and also to augment revenues. The Act has been brought into force in 1974 and thereafter it was intermittently dropped and revived. The Act was meant to discourage borrowings. u/s 26C of the Interest-tax Act, the lender is empowered to modify the terms of the loan agreement so as to pass the burden on to the borrower which itself shows that the Act applies strictly to loans and advances and not to investments. Section 26C also indicates that the Interest-tax Act is a special tax and that it provides for an indirect levy on the borrowers.

Taking note of the above object and scheme of the Act, the Bombay High Court in Commissioner of Income Tax Vs. United Western Bank Ltd., , held that interest for the purposes of the Interest Tax Act cannot include interest received by a bank on securities/debentures held by the assessee under the category of permanent assets in contrast with current assets, and the said decision was held applicable only to banks governed by the Banking Regulation Act, 1949.

The ratio laid down in the decision of Commissioner of Income Tax v. United Western Bank Ltd., referred supra, is squarely applicable to the facts and circumstances of the case on hand. Finding, therefore, no substantial question of law for our consideration in these appeals, we dismiss these appeals. Consequently, T.C.M.P . No. 581 of 2004 is closed.