IMPORTANT POINTS
Chargeable interest u/s 2(7) of Interest Act, 1974 covers interest on loans and advances and includes commitment charges and discount on promissory notes and bills of exchange.
Interest on investments is kept out of the purview of section 2(7).
Interest on bonds and debentures bought by an assessee as and by way of "investment" will not be chargeable u/s 2(7).

Headnote:(a) Interest Act, 1974 – Section 2(7) – Chargeable interest – Covers interest on loans and advances and includes commitment charges and discount on promissory notes and bills of exchange – Interest on investments is kept out of its purview – Hence interest on bonds and debentures bought by an assessee as and by way of "investment" will not be chargeable u/s 2(7). (Para 4, 5)
       (b) Reserve Bank of India Act, 1934 – Sections 45J, 45JA, 45K and 45Q r/w Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 – Para 6 – Deposits of public with Residuary and non Banking Finance Companies – Requirement of filing information with RBI and keeping their deposits and securities in public sector Banks – Bonds and debentures of approved nature bought by companies like the respondent constitute investment – Cannot be treated as loans and advances – Interest on such investment cannot be taxed under the Interest Tax Act, 1974. (Para 10)
       (c) Interest Act, 1974 – Section 2(5A) and (5B) r/w para 2, 1987 directives – Residuary non-Banking company like respondent – Not credit institution u/s 2(5A) – Not covered u/s 2(5B)(i) to (vi) prior to 1993 – Not liable to be taxed under the Act prior to AY 1993-94. (Para 11, 12)
       Facts of the case:
       The main issue arising in this batch of appeals is: Whether "interest" which the assessee earned on bonds and debentures was chargeable to tax in view of the definition of the term "interest" in Section 2(7) of the Interest Tax Act, 1974.
       Finding of the Court:
       Respondent is not liable to tax under 1974 Act.
       Result:
       Appeals dismissed.

Judgment :

In this batch of Civil Appeals, the main issue which arises for determination is: Whether "interest" which the assessee earned on bonds and debentures was chargeable to tax in view of the definition of the term "interest" in Section 2(7) of the Interest Tax Act, 1974.

Respondent Company is a company registered under the Indian Companies Act, 1956. One of the objects for which the company was incorporated is 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.

For deciding the afore-stated issue, one needs to examine the provisions of the Interest Tax Act, 1974 as under:

"2. In this Act, unless the context otherwise requires,-

"(5) "chargeable interest" means the total amount of interest referred to in section 5, computed in the manner laid down in section 6;"

"(5A) "credit institution" means,-

(i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act);

(ii) a public financial institution as defined in section 4A of the Companies Act, 1956 (1 of 1956);

(iii) a State Financial Corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporation Act, 1951 (63 of 1951); and

(iv) any other financial company."

(i) a hire-purchase finance company, that is to say, a company which carries on, as its principal business, hire-purchase transactions or the financing of such transactions;

(ii) an investment company, that is to say, a company which carries on, as its principal business, the acquisition of shares, stock, bonds, debentures, debenture stock, or securities issued by the Government or a local authority, or other marketable securities of a like nature;

(5B) "financial company" means a company, other than a company referred to in subclause (i), (ii) or (iii) of clause (5A), being-

(iii) a housing finance company, that is to say, a company which carries on, as its principal business, the business of the financing of acquisition or construction of houses including acquisition or development of land in connection therewith;

(iv) a loan company, that is to say, a company not being a company referred to in subclauses (i) to (iii) which carries on, as its principal business, the business of providing finance, whether by making loans or advances or otherwise;

(v) a mutual benefit finance company, that is to say, a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act, 1956 (1 of 1956), to be a Nidhi or Mutual Benefit Society;

(va) a residuary non-banking company other than a financial company referred to in sub-clause (i), (ii), (iii), (iv) or (v), that is to say, a company which receives any deposit under any scheme or arrangement, by whatever name called, in one lump sum or in instalments by way of contributions or subscriptions or by sale of units or certificates or other instruments or in any other manner; or

(vi) a miscellaneous finance company, that is to say, a company which carries on exclusively, or almost exclusively, two or more classes of business referred to in the preceding sub-clauses;"

(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-

(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;"

"(7) "interest" means interest on loans and advances made in India and includes- "Charge of tax

4.(1) Subject to the provisions of this Act, there s

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