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2006 DIGILAW 154 (UTT)

Commissioner of Income-Tax v. Nainital Bank Ltd.

2006-04-05

B.C.KANDPAL, P.C.VERMA

body2006
JUDGMENT P.C. Verma, J. 1. This appeal under Section 260A of the Income-tax Act, 1961 has been preferred against the order dated November 25, 2004, passed by the Income-tax Appellate Tribunal, Lucknow, in Income-tax Appeal No. 4/Alld of 1999 for the assessment year 1995-96, by which the Tribunal has dismissed the appeal filed by the Department. 2. The brief facts of the case giving rise to this appeal are that in the computation of income the appellant (respondent herein) showed the interest on G. P. notes amounting to Rs. 5,45,31,276 which had not been included in the chargeable interest. The contention of the respondent was that interest on securities and bonds were outside the interest-tax Act as this was not interest on loans and advances. The Assessing Officer did not accept this contention and relying on the Board's Instruction No. 1923 dated March 14, 1995, as well as Notification No. S.O. 2557 dated September 11, 1995 (see [1996] 217 ITR (St.) 5), stated that any amount chargeable to income-tax under the head "Interest on securities" was specifically excluded. This notification had specifically excluded "interest on securities" received by the banking companies with effect from the assessment year 1996-97. The Assessment Officer concluded that for the assessment year 1995-96, "interest on securities" was clearly taxable and, therefore, interest on G.P. notes amounting to Rs. 5,45,31,276 was included in the interest chargeable in the hands of the respondent. 3. Against the said order the respondent filed an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) allowed the appeal of the respondent-Nainital Bank holding that "Interest on securities" cannot be treated on par with 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 an appeal against the said order before the Income-tax Appellate Tribunal (hereinafter referred to as "the ITAT"). The Income-tax Appellate Tribunal in its order dated November 25, 2004, observed that the issue raised is Squarely covered by the decision of the High Court of Madras in CIT v. Lakshmi Vilas Bank Ltd. [1997] 228 ITR 697, 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. Feeling aggrieved, the Department has preferred this appeal. 4. We have heard learned Counsel for the parties. Feeling aggrieved, the Department has preferred this appeal. 4. We have heard learned Counsel for the parties. The following question of law arises 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 the Interest-tax Act, 1974, for the assessment year 1995-96 ? 5. 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 bonds was taxable under the Interest-tax Act, 1974. 6. Learned Counsel for the respondent placed reliance on the law laid down by the Division Bench of the Bombay High Court in the case of CIT v. United Western Bank Ltd. (and connected appeals), . In the said case the Division Bench of the Bombay High Court relying on the case of the apex court in CIT v. Madurai Mills Co. Ltd. , held as under (page 317) : 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 aside, 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. 7. 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. 7. In view of the above, we observe that the issue raised in the present appeal is squarely covered by the decision of the Division Bench of the Bombay High Court in the case of CIT v. United Western Bank Ltd. [2003] 259 ITR 312, and hold that the question raised in this appeal stands answered in favour of the assessee. 8. The appeal is dismissed. No order as to costs.