Holding

Interest earned on government securities is not chargeable to tax under section 2(7) of the Interest Tax Act, 1974.

Summary

The Revenue appealed against the Bombay High Court’s order upholding the Tribunal’s view that interest earned by ICICI Bank on government securities was not taxable under section 2(7) of the Interest Tax Act, 1974. The Supreme Court examined whether the interest in question fell within the definition of "interest chargeable to tax" and referred to its earlier decision in Commissioner of Income Tax v. Corporation Bank, which held that interest on government securities is exempt. The Court held that if the interest is solely on government securities, the Corporation Bank ratio applies and the interest is not taxable; otherwise the ratio does not apply. It directed the Tribunal to examine the factual position to determine the nature of the interest. Consequently, the appeals were dismissed, leaving the Tribunal’s and High Court’s findings intact.

Issues considered

Whether interest earned by a bank on government securities is chargeable to tax under section 2(7) of the Interest Tax Act, 1974.

Legislation cited

Income Tax Act, 1961s. 260A
Interest Tax Act, 1974s. 2(7), s. 4

Subjects

Interest Tax Actgovernment securitiestaxabilityIncome Tax TribunalHigh CourtCorporation Bank caseloans and advancesassessmentcivil appeal

Judgment

[2008] 14 S.C.R. 377

THE COMMISSIONER OF INCOME TAX, KOLHAPUR A
II.
ICICI BANK LTD.
(Civil Appeal Nos. 7441-7443 of 2004)
OCTOBER 13, 2008
B
[DR. ARIJIT PASAYAT AND DR. MUKUNDAKAM
SHARMA, JJ.]

Interest Tax Act, 1974 - s.2(7) - Interest on government
securities - Taxability of - Held: In view of Supreme Court's c
decision in Corporation Bank's case*, interest earned on gov-
ernment securities was held not taxable - In the instant case,
dispute between revenue and assessee as to whether, inter-
est earned was on government securities -Factual position
as to nature of interest involved required to be examined by
0
Tribunal.
~ The question which arose for consideration in these
appeals is whether Tribunal and High Court were justi-
fied in holding that the interest earned by assessee on
the government securities was not liable to be assessed E
under s.2(7) of the Interest Tax Act, 1974.
Disposing of the appeals, the Court
HELD: A similar question came up for consideration
before Supreme Court in *Commissioner of Income Tax v. F
- 4 Corporation Bank. The Revenue submitted that this deci-
\ sion related to the interest on government securities. The
assessee submitted that in the instant case the interest
earned was on government securities only. The stand is
denied by the revenue. The Tribunal is required to exam- G
ine as to whether the interest involved in the present case
is on government securities. If that be so, the ratio of the
~ decision in Corporation Bank's case would apply to the
facts of the present case and if the interest earned is not
377 H
378 SUPREME COURT REPORTS [2008] 14 S.C.R.

A solely on government securities, the ratio of the decision-+--~
will not apply. [Para 3 and 4] [379-C; 380-A,B & C] '
*Commissioner of Income Tax v. Corporation Bank
(2008) 166 Taxman 388 - referred to.
B CASE LAW REFERENCE
(2008) 166 Taxman 388 referred to Para 3, 4
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. -+-
7441-7443 of 2004
c From the final Judgment and Order dated 4.12.2002 of
the High Court of Judicature at Bombay in Income Tax Appeal
Nos. 1269, 1345 and 1346 of 2000
Mohan Prasaran, ASG., V. Shekhar, H. Raghavendra Rao,
D Gaurav Dhingra, D.L Chidananda and B.V. Balaram Das for
the Appellants.
Jayashree Wad, Ashish Wad, Neeraj Kumar, Chirag S. X.
Dav, Rajesh Kumar, Sathish Aggarwal, V. Prabhakar, Ramjee
Prasad, M.K.D. Namboodiry, R.S. Suri, Chinmoy Khaladker,
E S.K. Nandy and Revathy Raghavan (for Mis. J.S. Wad & Co.)
for the Respondents.
The Judgment of the Court was delivered by
DR. ARIJIT PASAYAT, J. 1. Challenge in these appeals
F is to the judgment of final order passed by the Bombay High
Court in a group of appeals filed by the revenue under Section ~
260A of the Income Tax Act, 1961 (in short the 'Act') read with
Section 24 of the Interest Tax Act, 1974 (in short the 'Interest
Act'). Question involved was whether interest earned by the as-
G sessee bank on government securities was liable to be as-
sessed under Section 2(7) of the Interest Act. The Income Tax
Appellate Tribunal (in short the 'Tribunal') held that it was not
chargeable. The High Court by the impugned judgment upheld ¥
the view of the Tribunal. The revenue filed the present appeals
H against the judgment of the High Court. It was submitted by
THE COMMISS. OF INCOME TAX, KOLHAPUR v. 379
ICICI BANK LTD. [DR. ARIJIT PASAYAT, J.]

learned counsel for the appellant that the Tribunal and the High A
--~~
Court were not justified in holding that loans and advances do
not include interest on securities, bonds, debentures and there-
fore not liable to tax under the provisions of the Interest Act. It is
submitted that interest on securities falls within the meaning of
"Interest chargeable to tax" as defined under Section 2(7) of the B
Interest Act.

+--
2. Learned counsel for the respondent, assessee-Bank
on the other hand supported the judgment of the Tribunal as

.·:, upheld by the High Court.
3. A similar question came up for consideration before this
c
Court in Commissioner of Income Tax v. Corporation Bank
(2008 (166) Taxman 388). This court held as follows:
"Leave granted in special leave petitions.
D
The short point which arises in this batch of civil appeals
is whether interest earned by the assessees-banks on
dated Government securities was liable to be assessed
""' under section 2(7) read with Section 4 of the Interest Tax
Act, 1974. In our view, there is a basic difference between
loans and advances on the one hand and investments/ E
securities on the other. This difference is indicated in the
provisions of the 1.ncome tax Act, the Companies Act as
well as the Bank Regulation Act. These aspects have been
discussed in detail in two decisions of the Bombay High
Court, namely Discount and Finance House of India Ltd. F
_...4 v. S.K. Bhardwaj, CIT reported in MANU/MH/0628/2002,
\
as also in another decision of the Bombay High Court
reported in MANU/MH/0629/2002 in the case of CIT v. ·
United Western Bank Ltd. It is not in dispute that the
revenue has accepted the aforesaid two judgments of the G
Bombay High Court. We are in agreement with the view
expressed by the Bombay High Court.
v
For the aforestated reasons there is no merit in the civil
appeals filed by the department. The same are dismissed
H
380 SUPREME COURT REPORTS [2008) 14 S.C.R.

A No order as to costs."
4. Learned counsel for the appellant submitted that this
Court's decision related to the interest on government securi-
ties. Learned counsel for the assessee submitted that in the
instant case the interest earned was on government securities
8 only. The stand is denied by learned counsel for the appellant.
Let the Tribunal examine the factual position as to whether the
interest involved in the present case is on government securi- ·
ties. If that be so, the ratio of the decision in Corporation Bank's -*
I

case (supra) will apply to the facts of the present case and if the
C interest earned is not solely on government securities, the ratio
of the decision will not apply.
5. The appeals are disposed of accordingly.
D.G. Appeals disposed of.

,')-