Interest on debentures is not taxable under the Interest Tax Act, and notional interest cannot be considered as part of chargeable interest unless provided for by the statute.

R. Sudhakar, J.

1. The above Tax Case (Appeals) filed by the Revenue as against the order of the Income Tax Appellate Tribunal for the assessment years 1993-94 and 1994-95 were admitted by this Court on the following substantial questions of law:

"1. Whether on the facts and in the circumstances of the case, the Income Tax Tribunal is right in law in holding that interest on debentures will not form part of chargeable interest under the Interest Tax Act?

2. Whether on the facts and in the circumstances of the case, the Income Tax Tribunal is right in law in holding that addition of notional interest are to be reckoned with for the purpose of calculating the chargeable interest under the Interest Tax Act?

3. Whether on the facts and in the circumstances of the case, the Income Tax Tribunal is right in law in following the judgment rendered in the case of Lakshmi Vilas Bank reported in 228 ITR 697 which was clearly a case dealing with pre-amended provisions of the Interest Tax Act which was applicable upto the assessment year 1991-92 and not subsequently?"

2. The assessee/respondent in both the appeals is engaged in the business of investment and share broking. They held shares in a company called M/s.Sona distillers, which got amalgamated with M/s.Herbertson Limited. On such amalgamation, debentures were issued by the new company in respect of the interest earned on these debentures. The assessee was allotted convertible debentures in the above company in respect of shares held by the assessee in M/s.Sona Distilleries. Therefore, the assessee claimed exemption on the ground that the nature of investment is not chargeable under the Interest Tax Act. The Assessing Officer declined to accept such a claim and included the interest on debentures in the chargeable interest. The second issue relates to addition of notional interest. While arriving at the chargeable interest, the Assessing Officer added certain items of interest receivable from Devi Investments, Until Communication, Vinayaka Castings and UB Electronics to whom advances have been made and held that interest on advance for shares should also be included for the purpose of Interest Tax Act.

3. Aggrieved by the order of the Assessing Officer, appeals were filed before the Commissioner of Income Tax (Appeals), who dealt with the issue relating to interest tax on debentures in paragraph 2.2 of the order and held in favour assessee. Placing reliance on the decision of the High Court in the case of CIT v. Lakshmi Vilas Bank reported in (1997) 228 ITR 697, the Commissioner of Income Tax (Appeals) in paragraph No.2.2 held as follows:

"2.2 I have carefully considered the arguments of the learned counsel and the reasons adduced by the AO for effecting the addition. Debentures are essentially in the nature of bonds issued by companies and in the instant case, it is essentially investment. Because firstly these debentures came to be allotted to the appellant on amalgamation of the company where share the appellant held. Secondly, these debentures were fully converted into shares of M/s.Herbertson Limited on a later date. Such debentures clearly falls outside the purview of loans and advances mentioned in the interest tax act. I have also gone through the decision of the Hon'ble High Court of Madras in the case of CIT v. Lakshmi Vilas Bank reported at 138 CTR 230 wherein the Hon'ble High Court has clearly held that debentures are distinctly different from loans and advances. Respectfully following the decision of the Hon'ble High Court, the issue is decided in favour of the appellant. The addition made on this count is deleted."

4. Insofar as the addition of notional interest is concerned, the assessee contended that the notional interest was an item which was never received or was receivable by the assessee and that such notional interest falls outside the purview of chargeable interest under the Interest Tax Act. This contention was accepted by the Commissioner of Income T