According to legal sources, UTI was brought under the purview of the Interest Tax Act following the definition of "credit institution" which was introduced with effect from October 1, 1991, sub-clause (ii) of clause (5A) of section 2 of interest tax 1974.

This included public financial institutions as defined in section 4A of the companies' act 1956, within the meaning of "credit institutions". Sources said that UTI became an assessee under the Interest Tax Act for the first time with effect from October 1, 1991.

Contradicting the view, UTI has urged that income is what comes in and therefore the receipt of interest is also income. UTI has argued that under Section 32 of UTI Act 1963, the receipt of interest would be exempt from the purview of Interest Tax.

The IT department is understood to have refuted the argument stating that while making Interest Tax effective from October 1, 1991, the finance minister had clearly stated that Interest Tax would be levied on the gross amount of interest, and has nothing to do with the income under the head interest.

The IT department has slapped a tax claim in the range of Rs 1,200 crore to Rs 1,300 crore on UTI under the Interest Tax Act.

UTI contends that section 32 of UTI Act which was enacted in 1963 to exclude the operation of Income Tax act 1961, super profit act 1963, or any other enactment for the time being in force relating to Income Tax, super tax or any other tax on income, profits and gains from any source, was subsequently expanded to include the Wealth Tax Act 1957, and Companies' (profit) surtax Act 1964. Thus, IT contends that the legislature specifically inserted the various direct tax act in section 32 of the UTI Act whenever it intended the UTI to be spared of the burden from their operation. However, by not inserting the Interest Tax Act in section 32 of UTI Act, after specifically bringing UTI under "credit institutions", the legislature made its intention very clear of taxing UTI as new entities.

Further, UTI's reference to letter of CBTD dated October 10, 1991, has also been refuted by the department on the grounds that the letter was addressed to the department of economic affairs and not to UTI. It contends that the letter in question is neither an order not an instruction nor a direction issued by the CBDT.

Referring to the said letter, IT is understood to have stated that any credit institution may be exempted from the levy of Interest Tax by the central government only on recommendation of the Reserve Bank of India through a notification in official gazette. "Thus the letter of CBDT has no legal sanctity and is absolutely null and void and cannot be relied by UTI," legal sources said.

Moreover, the alternative plea taken by the UTI relating to provisions of Interest Tax Act being unconstitutional is also without any merit because as per Article 246 of the Indian constitution, the parliament has exclusive powers to make law in respect of 97 items of the Union List in the seventh schedule to the Indian Constitution.

BOX According to lawyers, UTI makes for a interesting case. While on one hand UTI being a public Institution under Section 4(A) of the Companies Act 1956, it is a crdit Institution which makes it liable to pay the interest tax. On the other hand, UTI - Section 32 of UTI Act 1963 exempts any income from any tax applicable giving it a exemption from the interest rate tax. According to them, though ideally there should have been changes made in the UTI Act -1963 to include the Interest Rate Tax which came in the picture on 1974, the statement is wide enought to cover income from all sources. This makes it a strong point for UTI to argue.