Interest-tax — Interest on bonds and debentures bought by a non-banking financial company as and by way of investment would not be liable to interest-tax.

[Commissioner of Income-tax v. Sahara India Savings and
Investment Corporation Ltd., (2010) 321 ITR 371 (SC)]

In a batch of civil appeals before the Supreme Court the main
issue which arose for determination was : Whether ‘interest’ which the assessee
earned on bonds and debentures was chargeable to tax in view of the definition
of the term ‘interest’ in S. 2(7) of the Interest-tax Act, 1974 ?

One of the objects of the respondent company for which the
company was incorporated was to buy, sell, invest or otherwise deal in
securities, bonds or fixed deposits issued by any institution, body corporate,
corporation, establishment constituted under any Central or State laws or any
other securities in which the company may be required to invest under any law in
force.

The Supreme Court held that S. 2(7) defines the word
‘interest’ to mean interest on ‘loans and advances including commitment charges,
discount on promissory notes and bills of exchange, but not to include interest
referred to u/s.42(IB) of the Reserve Bank of India Act, 1934, as well as
discount on treasury bills’. S. 2(7), therefore, defines what is interest in the
first part and that first part confines interest only to loans and advances,
including commitment charges, discount on promissory notes and bills of
exchange. Therefore, it is clear that the interest-tax is meant to be levied
only on interest accruing on loans and advances but the Legislature, in its
wisdom, has extended the meaning of the word ‘interest’ to two other items,
namely, commitment charges and discount on promissory notes and bills of
exchange. In normal accounting sense, ‘loans and advances’, as a concept, are
different from commitment charges and discounts and, keeping in mind the
difference between the three, the Legislature, in its wisdom, has specifically
included in the definition u/s.2(7) commitment charges as well as discounts. The
fact remains that interest on loans and advances will not cover u/s.2(7)
interest on bonds and debentures bought by an assessee as and by way of
‘investment’. Even the exclusionary part of S. 2(7) excludes only discount on
treasury bills as well as interest u/s.42(IB) of the Reserve Bank of India Act,
1934. Reading S. 2(7) as a whole, it was clear to the Supreme Court that
‘interest on investments’ was not taxable as interest u/s.2(7) of the said 1974
Act.