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Housing & Urban Development Corpn. Ltd. Vs. The Dy. Commissioner Of Income Tax
July, 28th 2016
R-7 & 8
+                ITA 348/2003

                                                    ..... Appellant
                    Through: Ms. Neha Sangwan, Advocate for M.
                    Chirag M. Shroff, Advocate on record.


                                             ..... Respondents
                    Through: Mr. Ashok K. Manchanda,                          Sr.
                    Standing Counsel for ITD

+                             ITA 247/2004

                                                       ..... Appellant
                              Through: Ms. Neha Sangwan, Advocate for M.
                              Chirag M. Shroff, Advocate on record.


                                                       ..... Respondents
                              Through: Mr. Ashok K. Manchanda,                Sr.
                              Standing Counsel for ITD
%                    21.07.2016

1.     The common question framed in both these appeals filed by Housing
and Urban Development Corporation Ltd. (HUDCO) against the orders

ITA 348/2003 & ITA 247/2004                                     Page 1 of 7
dated 17th March, 2003 and 8th January, 2004 of the Income Tax Appellate
Tribunal (ITAT) for Assessment Years 1994-95 and 1995-96 respectively
reads as under:
         "Whether the appellate Tribunal has substantially erred in law
         and in the facts of the case, in holding that the Assesses
         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."

2.     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

3.     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). The ITAT by the
aforementioned impugned orders affirmed the orders of the AO and the CIT
(A). It concluded 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

ITA 348/2003 & ITA 247/2004                                    Page 2 of 7
Interest Tax Act." The ITAT concluded that the terminology adopted by
HUDCO "is of no consequence".

4.     Ms. Neha Sangwan, learned counsel for HUDCO drew the attention
of the Court to a decision of the Special Bench of the ITAT which dealt with
the same issue, involving the assessments of HUDCO the for the AYs 1993-
94, 1996-97 and 1992-93 (Interest Appeal Nos. 6, 7 and 40/2000). The
question addressed by the Special Bench reads as under:
            "Whether on facts and in the circumstances of the case, the
            interest earned by the assessee corporation from Investments
            made by way of short term deposits, with public
            undertakings and also in the form of securities and bonds
            etc. can be covered under the definition of "Loans and
            Advances" chargeable to tax under section 2(7) read with
            Section 5 of the Interest Tax Act."

5.     After discussing the definition of interest as contained in Section 2(7)
of the ITA and the decisions of the Supreme Court as well as of the High
Courts, the Special Bench concluded that there is a distinction between the
expression ,,deposit and the term ,,loans and advances. It was held:
         "20. ........ Furthermore "loans" and "deposits" cannot be taken
         to be identical in meaning when a recourse is taken to the
         provisions contained under the Companies Act, 1956. Section
         58A and section 227 of the Companies Act, 1956 in itself
         clearly place distinction between the two expressions. The
         explanation added to Section 370 of the Companies Act, 1956
         by the Companies (Amendment) Act, 1988 for including
         deposits for the purpose of loan was for a limited purpose of
         inter corporate transaction and a similar amendment has not
         been made in the Act under which the issue is being
         considered. The revenues plea that the decision rendered by
         Bombay Bench of the Tribunal in LIC v. JCIT was in respect

ITA 348/2003 & ITA 247/2004                                      Page 3 of 7
         of statutory Corporation also does not render any assistance to
         the issue under consideration, since the statute under
         consideration does not provide for any dichotomy on the
         applicability of its provision on the basis of status of an

         21. From the following speech of Finance Minister given at the
         time of introducing the act, it can be inferred that interest on
         deposit is not to be included in the definition of interest under
         this act:
                  "These institutions would reimburse themselves by
                  making necessary adjustments in the interest rates changed
                  from borrowers. The proposed tax is expected to raise the
                  cost of borrowing and yield revenue to the Government."

         The interest was not to be borne by the lender but by the
         borrower. In cases of lending made before 1.10.1991 credit
         institutions were specifically empowered to vary the rate of
         lending so as to reimburse of the extra charge going to fall on
         them by the introduction of the act. Section 26C was
         specifically introduced in the act for this purposes. Now in
         case of deposit there is no such power with the depositor to
         recover the said amount from the depositee. This again
         indicates that the two expressions are different.

         22. From the foregoing discussion we are of the considered
         view that despite similarities, the two expressions "loans" and
         "deposits" are to be taken different and distinction can be
         summed up by stating that in the case of loan the needy person
         approaches the lender for obtaining the loan there from. The
         loan is clearly lent at the terms stated by the lender. In the
         case of deposit, however, the depositor goes to the depositee
         for investing his money primarily with the intention of earning
         interest. In view of this legal position it has to be held that
         interest on deposits representing investment of surplus funds
         would also not fall under the definition of interest as given in
         section 2(7) of the Act and as such would not be liable to
         interest tax. The answer to the question under reference in our
         humble opinion is that investments made by way of short term

ITA 348/2003 & ITA 247/2004                                              Page 4 of 7
         deposits and also in the form of securities and bonds cannot be
         considered as loans and advances and as such interest thereon
         shall be outside the scope of ,,interest defined under section
         2(7) of the Act."

6.     The Special Bench then remanded the issue arising for the said three
AYs to the AO for a fresh decision in light of the decision. Ms. Sangwan
states that to the best of the information of HUDCO, the aforementioned
decision of the Special Bench, which was delivered on 25th November, 2005
(subsequent to the order of the ITAT forming the subject matter of the
present appeals), was not challenged and has attained finality.

7.     Mr. Ashok K. Manchanda, learned Senior standing counsel for the
Revenue first submitted that the definition of 'interest' under Section 2(7) of
the ITA would include interest on deposits as well. According to him this
was evident from the language of the definition. He submitted that since
'deposit' did not feature in the excluded category of the definition, it should
be taken to be included within expression ,,loans and advances.

8. Section 2(7) of the ITA reads as under:
               "(7) "Interest" means interest on loans and advances
                   made in India and includes:

               (a) commitment charges on unutilised portion of any
               credit sanctioned for being availed of in India; and

               (b) discount on promissory notes and bills of exchange
               drawn or made in India,

               but does not include ­

ITA 348/2003 & ITA 247/2004                                       Page 5 of 7
            (i) interest referred to in sub-section (1B) of Section 42 of
            the Reserve Bank of India Act, 1934 (2 of 1934);

            (ii)       discount on treasury bills;"

9.     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 of Mr. Manchanda 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.
10. 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

ITA 348/2003 & ITA 247/2004                                      Page 6 of 7
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.

11. Apart from the above, the Special Bench of the ITAT has answered the
question in favour of HUDCO for the AYs 1992-93, 1993-94, 1996-97. The
present appeals pertain to AYs 1994-95 and 1995-96. Therefore, applying
the rule of consistency, the Court holds that there is no reason why the
Revenue should not be asked to follow the judgment rendered by the Special
Bench of ITAT which view has been accepted by it and has attained finality.

12.    For the aforesaid reasons, the question framed in both appeals is
answered in negative i.e. in favour of the Assessee and against the Revenue.
The impugned orders of the ITAT in both the appeals are set aside and both
the appeals are allowed with no orders as to costs.

                                                      S. MURALIDHAR, J

                                                      NAJMI WAZIRI, J
JULY 21, 2016

ITA 348/2003 & ITA 247/2004                                     Page 7 of 7
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