COMMISSIONER OF INCOME TAX vs. M/S NAINITAL BANK LTD.
What did the High Court hold?
The High Court held that the issue was squarely covered by the decision of the Division Bench of the Bombay High Court in CIT vs. United Western Bank Ltd. (259 ITR 312). In that case, the Bombay High Court, relying on the Apex Court's decision in CIT vs. Madurai Mills Co. Ltd. [1973] 89 ITR 45 (SC), confined its judgment to assessee-banks governed by the Banking Regulation Act, 1949. The Court noted that under the Banking Regulation Act, 'investments' and 'advances' are distinct categories on the assets side. While acknowledging that banks might hold securities as stock-in-trade, the judgment in the cited case was limited to 'permanent' investments. Consequently, the High Court found that the question raised in the present appeal stood answered in favour of the assessee. The appeal was dismissed.
What were the facts?
The assessee, M/s Nainital Bank Ltd., for Assessment Year 1995-96, did not include interest on G.P. Notes amounting to Rs. 5,45,31,276/- in its chargeable interest, contending it was not interest on loans and advances and thus outside the Interest-tax Act, 1974. The Assessing Officer disagreed, citing Board's instruction No. 1923 and Notification No. So 2557, and included the amount. The CIT (Appeals) allowed the assessee's appeal. The Income Tax Appellate Tribunal (ITAT) dismissed the Department's appeal, relying on CIT vs. Laksmi Vilas Bank Ltd. (Madras High Court). The Commissioner of Income Tax (Haldwani) has filed this appeal against the ITAT's order.
What were the issues?
1. Whether the Tribunal was correct in law in holding that 'Interest on Securities' is not chargeable to Interest Tax under the Interest-tax Act, 1974 for the Assessment Year 1995-96? Assessee's Contention: The assessee argued that interest on securities and bonds were outside the Interest-tax Act as it was not interest on loans and advances. The ITAT relied on CIT vs. Laksmi Vilas Bank Ltd. (228 ITR 797). Revenue's Contention: The revenue contended that the legislature intended to tax interest on securities, evidenced by the deletion of an exclusionary clause, bringing it within the ambit of 'interest on loans and advances' under Section 2(7). They argued that a bank subscribing to government securities effectively provides a loan to the government. The revenue relied on the Board's instruction No. 1923 dated 14.03.1995 and Notification No. So 2557 dated 11.9.1995.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
order the Department filed appeal before the Commissioner of Income Tax (Appeals). The CIT (appeals) allowed the appeal of respondent Nainital Bank holding that ‘interest on securities’ cannot be treated on par with on loans and advances and, therefore, the interest on Government Promissory Notes (GP Notes) amounting to Rs.5,45,31,276/- should not be included in the chargeable interest. The Department Preferred appeal against the said order before the Income Tax Appellate Tribunal (hereinafter referred to as the ITAT). The ITAT in is order dated 25.11.2004 observed that the issue raised is squarely covered by the decision of the High Court of Madras in CIT versus Laksmi Vilas Bank Ltd. (228 ITR 797) and held that interest on Government securities is not chargeable to tax under the Interest Tax Act and dismissed the appeal of the Income Tax Department. Felling aggrieved, the Department has preferred this appeal.
We have heard the learned counsel for the parties. The following question of law raises for the assessment year 1995-96:-
“Whether the Tribunal was correct in law in holding that “Interest on Securities” is not chargeable to Interest Tax under Interest-tax Act, 1974 for the Assessment Year 1995-96?”
The learned counsel for the appellant contended that because the legislature intended to tax interest on securities, the exclusionary clause was deleted and, thereby interest on securities came within the ambit of the expression “interest on loans and advances” in the main section 2(7). He contended that when the bank subscribes to the Government Securities, it gives a loan to the Government although in the balance-sheet, it is shown as investments. He, therefore, submits that interest received by the banks on securities and bounds was taxable under the Interest-tax Act, 1974. 6. The learned counsel for the respondent placed reliance of law laid down by the Division Bench of Bombay High Court in the case Commissioner of Income Tax versus United Western Bank Ltd. (and connected appeals), reported in Income Tax Reports (Vol.259) Bombay High Court), page 312. In the said case the Division Bench of the Bombay High Court relying the case of the Apex Court in CIT versus Madurai Mills Co. Ltd. [1973] 89 ITR 45 (SC) held as under:- “We are confining this judgment to the case of the assessee-banks governed by the Banking Regulation Act, 1949. Under the Companies Act also the form of balance-sheet is prescribed. In that form, on the assets side, we have a column under the caption “current assets”. We do not have such a column of “current assets” under the Banking
Regulation Act. Under the banking Regulation Act, on the assets side, we have “investments” and “advances”. However, we do not agree with the contention of the assessee that banks do not hold securities as stock-in-trade. In the annual report submitted by the United Western Bank Limited for the accounting year 1993-94-Schedule 17 deals with “Notes forming part of the accounts” in which it has been clarified under the caption “investments” that the bank holds investments in Government and other approved securities under two categories, viz, “permanent” and “current”. Therefore, we are confining our judgment only to investments under the category “permanent”. We do not wish to express our opinion on securities/debentures held under the caption “current”.”
In view of above, we observe that the issue raised in the present appeal is squarely covered by the decision of the Division Bench of Bombay High Court in the case Commissioner of Income Tax versus United Western Bank Ltd (supra) and held that the question raised in this appeal stands answered in favour of the assessee.
The appeal is dismissed. No order as to costs.
(B.C.Kandpal, J.)
(P.C.Verma, J.)
Dated: April 5, 2006. P.Singh
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