Reprieve for banks as tribunal says interest tax not applicable to gilts

Monday, November 17 1997

Reprieve for banks as tribunal says interest tax not applicable to gilts

Manju Menon

Mumbai, Nov 16: The Bangalore bench of the Income-Tax Appellate Tribunal (ITAT) has, in a recent judgment involving Canara Bank and Vysya Bank, held that interest on securities cannot be brought to tax under the provisions of the Interest Tax Act.

According to legal experts, the judgment is significant in the light of the fact that public sector banks face interest tax liabilities of around Rs 800 crore for the 1991-95 period. In 1995, the government specifically exempted interest on securities from interest tax, but tax claims relating to the 1991-95 period are still hanging fire. In the case of Canara Bank and Vysya Bank alone, the recent ITAT judgment brings relief to the entent of Rs 60 crore and Rs 12 crore respectively.

In the case between Canara Bank, Bangalore, and the deputy commissioner of income-tax, the ITAT bench comprising PK Ammini and S Bandhopadhyay held that "interest on securities cannot be brought to tax....Only interest on loans and advances is chargeable to tax under the provisions of the Interest Tax Act". In a single judgment delivered for both Canara Bank and Vysya Bank, the bench said: ".. while the government issues securities, it may, at best, be treated as loan; but at the hands of the bank it is an investment in securities".

The Canara Bank appeal related to four assessment years, 1992-93, 1993-94, 1994-95 and 1995-96. For these periods, the bank filed returns declaring chargeable interest of around Rs 3,200 crore.

However, the assessing officer (AO) reopened the assessement for 1992-93 and 1993-94 on the ground that the bank failed to declare the entire interest earned on securities. The remaining two assessments were also taken up for scrutiny.

Objecting to this, Canara Bank claimed that only loans and advances could fall within the purview of the definition of `interest' under the Interest Tax Act.

The Act, which was originally introduced in 1974, was withdrawn in 1978, reintroduced in 1980, withdrawn again in 1985 and revived yet again in 1991-92. In 1974, the Act specifically excluded `interest on securities' from its purview.

While another notification issued on September 11, 1995, under section 28 of the Interest Tax Act again exempted "interest on securities" from the Act, the period between 1991 and 1995 has been a matter of dispute between banks and the tax department.

According to Canara Bank's counsel VR Gupte, though the clause giving exemption to "interest on securities" had been omitted from the 1991-92 Act, the objective and reasoning for introducing the Act remained the same as before. He further contended that the then finance minister (Manmohan Singh), while reintroducing the Act, had deliberately and consciously omitted to mention the exclusion of securities.

Uphelding Gupte's view, the bench noted that "if the legislature intended to include interest on securities as chargeable to tax, there was no difficulty for it to have used the expression `including the interest on securities' within the ambit of section 2(7) of the Act."

Further, referring to the 1991-92 budget speech, the tribunal said it was clear that Manmohan Singh intended to extend the number of institutions covered by the Act, but his intention was not to include securities under the its provisions.

Citing another reason for the exclusion of securities from the Act, the judgment notes that the chargeability of `interest on securities', dealt with in Sections 18 to 21, were omitted in the Finance Act of 1988.Referring to the provisions of the Public Debt Act, counsel for the income-tax department, RB Krishna, advanced the argument that securities were nothing but loans.

On the other hand, the Canara Bank counsel said "if a bank advances an amount to a debtor it is a loan, but the when the bank purchases securites from the government, it becomes an investment".

According to him, the bank has no choice in fixing the rate of interest while purchasing securities as this rate is fixed by the government. The liability on securities cannot be passed on to the government unlike loans and advances, where the liability is fastened to the debtor", he argued.According to Mumbai-based chartered accountant Atul Suirya, interest on securities should be treated on a different footing as banks subscribe to them to maintain their statutory liquidity ratio requirements.