Surplus Funds invested with Companies would fall within the meaning of ‘interest’ u/s 2 (7) of the Interest Tax Act; Delhi HC [Read Judgment]

Denying refund - Delhi HC - taxscan

The Delhi High Court has recently declared that the surplus funds invested with companies would fall within the meaning of s. 2 (7) of the Interest Tax Act. The sole question of law raised before the Court was that “Whether the appellate Tribunal has substantially erred in law and in the facts of the case, in holding that the Assesse‟s deposits with SAIL amounted to loan and/or advance within the meaning of Section 2(7) of the Interest Act as amended with effect from 1st October, 1991.”

In the present case, the assessee, HUDCO is in the business of financing housing projects promoted by various organisations including the State Governments. It is stated that during the course of its business, HUDCO deposits with various companies the surplus funds that are available to it. In the AYs in question, surplus funds were deposited by HUDCO with the Steel Authority of India Limited.

The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected the plea of HUDCO that the interest earned on the deposit did not fall within the definition of ‘interest’ under terms of Section 2 (7) of the Interest Tax Act, 1974 (ITA). However, the Appellate Tribunal has quashed these order by holding that since money had been placed at the disposal of the SAIL under a contract, it could partake the character of a loan for which compensation of interest has been paid by SAIL to the Assessee.

The ITAT further observed that “as far as SAIL is concerned would be a loan because they have to repay it on the terms and conditions and since the amount is advanced in the form of a loan though it may be stated to have been deposit with the SAIL, it would fall within the definition of Section 2(7) of the Interest Tax Act.” The ITAT concluded that the terminology adopted by HUDCO “is of no consequence”.

The High Court after hearing the rival contentions, opined that the definition to the extent it uses the word ‘means’ purports to be exhaustive. However, it has both an ‘includes’ and a ‘does not include’ portion. Apart from interest on „loans and advances‟, what is included are only two categories: (i) commitments charges and (ii) discounts on promissory notes and bills. There is no other transaction that is contemplated under the inclusive portion. As far as exclusionary portion is concerned, there are again only two categories excluded i.e. (i) interest referred to in Section 1B of Section 42 of the Reserve Bank of India Act and (ii) discount on treasury bills. There is no scope of going beyond the above definition of ‘interest’. When a definition uses an expression means and that is followed by „interest on loans and advances‟ it should be considered as being exhaustive of the entire definition. However, the legislature has intended to ‘include’ other two transactions under the definition. Those two transactions do not include interest on deposits. It is not therefore possible to accept the submission that the expression „interest on loan and advances‟, occurring in Section 2(7) of the Act should include „interest on deposits‟ as well notwithstanding that there is no reference to such interest in the definition itself.

While confirming the observations made by the ITAT, the division bench of the High Court pointed out that “The Special Bench of the ITAT was conscious of this submission made before it and has rejected it and in view of this Court rightly. What the ITAT appears to have done in the impugned order is to re-characterise the contract entered into between HUDCO and SAIL for the purpose of the former placing deposits with the latter as a loan transaction. There was no occasion for the ITAT to do so only with a view to bringing it within the definition of Section 2(7) of the ITA, when the plain language of the statute does not contemplate interest on deposits as being included.”

Read the full text of the Judgment below.

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