According to sources close to the I-T tribunal, LIC had gone on appeal against the stand taken by the department and subsequently lost all the first appellate stages, where all the CIT appeals have confirmed the stand of the department. At present, the case is pending before the tribunal.

This assumes significance in the light of the fact that the department has also slapped an interest tax claim in the range of Rs 1,200 crore to Rs 1,300 crore on Unit Trust of India (UTI), against which the latter has filed a petition before the Bombay High Court.

The income tax department is understood to have contended that up to 1992-93, financial institutions were not to be taxed on interest income.

However, after the revival of Finance Act-(II) 1991, all public institutions under section 4A of Companies Act, 1956, have been defined as 'credit institutions' under sub-clause (ii) of Clause (5A) of Section 2 of Interest Tax Act. This brings all institutions - ICICI, IDBI, IFCI, LIC and UTI as assessees under the Interest Act for the first time with effect from October 1, 1991. Thus, LIC comes under the ambit of those institutions required to file returns on interest tax.

However, LIC has been paying its interest tax on interest collected by it, but is said to have been contesting interest tax on government securities, bonds and government debentures.

Further, LIC has been brought under the interest tax net as under the Interest Tax Act effective October 1, 1991, it has been clarified that interest tax is levied on the gross amount of interest and has nothing to do with income under the head interest, said sources.

The IT department is understood to have taken a firm stance on UTI on similar grounds, as it also falls under the definition of 'credit institution.' Besides, it is gross interest on which tax is to be levied and not income under the head interest, said legal sources.

They further added that if UTI is to be taxed for interest income under investments in government securities, bonds and government debentures, the tax liability might go up from existing claim.

At present, other financial institutions, General Insurance Corporation (GIC), Industrial Development Board of India (IDBI) etc are paying interest tax as well as separate tax on income from investments in government securities, bonds and government debentures.