B.P. Saraf, J.
1. By this reference under Section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal ('Tribunal') has referred the following question of law to this court for opinion at the instance of the assessee :
'Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the discount on Treasury Bills is assessable as income from business and not as interest on securities ?'
2. The assessee is a banking company. In its assessment for the assessment year 1977-78, the assessee claimed that its income from interest and discount on the treasury bills amounting to Rs. 20,62,034 should be considered as income from securities, though in the computation of total income originally furnished along with the return the assessee itself had considered and shown the same as business income. It was contended that the treasury bills were securities under the Public Debt Act and discounts earned on the same represented interest on securities. The Income-tax Officer did not accept the above claim of the assessee. According to him, the amount received by the assessee-bank on discounting of treasury bills did not represent interest on securities. The Income-tax Officer, therefore, held that the income from discounting of treasury bills was business income of the assessee and not income from securities. Against the above order of the Income-tax Officer, the assessee appealed to the Commissioner of Income-tax (Appeals). The Commissioner (Appeals) reversed the order of the Income-tax Officer following his own order in Citi Bank's case on the very same issue. The Revenue appealed to the Tribunal against the above order of the Commissioner (Appeals). In the meantime, the appeal of the Revenue against the order of the Commissioner (Appeals) in CitiBank's case were heard by the Tribunal. The Tribunal reversed the order of the Commissioner (Appeals) and held that the income received by the assessee on discounting of treasury bills was a trading receipt as it was nothing but excess of sale price over the purchase price of treasury bills. The Tribunal also refused to take into account the communication of the Reserve Bank of India dated May 21, 1980, addressed to the Manager, Banque National De Paris, Bombay, by which he was informed that the earnings on treasury bills could be considered as interest on securities as security bills were also a form of Government securities under Section 2 of the Public Debt Act, 1944. Hence, this reference.
3. We have heard Mr. Dastur, learned counsel for the assessee, who submits that discount on treasury bills is nothing but interest on securities and hence assessable not as business income but as interest on securities. It was further submitted that the treasury bills, which are issued by the Central Government or the State Government, are securities of the Central or the State Government and interest thereon is interest on securities chargeable under Section 18 of the Act. Our attention was also drawn to the fact that treasury bills are issued by the Government when it requires temporary loans and the sale and purchase thereof is managed by the Reserve Bank of India. Mr. Khatri, learned counsel for the respondent, on the other hand, submits that the discount on treasury bills would be assessable not as interest on securities but as business income. In support of this contention, he relies on the reasoning and conclusion of the Tribunal.
4. We have carefully considered the rival submissions. Section 14 of the Income-tax Act enumerates the various heads under which the income of an assessee shall be charged to income-tax. One of the heads is Income from securities. Section 18 of the Act deals with 'interest on securities'.
It provides :
'The following amounts due to an assessee in the previous year shall be chargeable to income-tax under the head 'Interest on securities',--
(i) interest on any security of the Central or State Government not being interest payable under Section 280D in respect of any annuity deposit made under Chapter XXII-A.
(ii) interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act'
5. It is clear from a plain reading of the above provision that interest on securities issued by the Central Government, State Government, local authority, a company or a statutory corporation is chargeable to income-tax under the head 'Interest on securities'. The controversy in this case is whether the treasury bills are securities within the meaning of Section 18 of the Act and whether the discount received thereon is business income or interest on securities.
6. We may first examine whether treasury bills are securities of the Government. For this purpose, we may refer to the definitions of 'Government Security' contained in the Public Debt Act, 1944. 'Government security' has been defined in Clause (2) of Section 2 of the said Act to mean :--
'(a) a security, created and issued, by the Government for the purpose of raising a public loan, and having one of the following forms, namely :--
(i) stock transferable by registration in the books of the Bank ; or
(ii) a promissory note payable to order ; or
(iii) a bearer bond payable to bearer ; or
(iv) a form prescribed in this behalf ;
(b) any other security created and issued by the Government in such form and for such of the purposes of this Act as may be prescribed.'
7. Promissory note has been defined in Clause (4) of the said Section to include a 'treasury bill'.
8. It may also be pertinent in this connection to refer to the definition of Government securities given in the Indian Securities Act, 1920, which is the law governing Government securities. 'Government security' has been defined in Clause (a) of Section 2 of the said Act to mean :
'Promissory notes (including treasury bills), stock certificates, bearer bonds and all other securities issued by the Central Government at any time or by the Government of any Part A State before the 1st November, 1956, or by a State Government on or after that date in -respect of any loan contracted either before or after the passing of this Act, but does not include a currency note.'
9. It is abundantly clear from the definition of 'Government Security' contained in the above two enactments that treasury bills are Government securities.
10. The next question is whether earnings by way of discounting of treasury bills can be regarded as 'interest' on Government securities. For this purpose, we may refer to the definition of interest contained in the Income-tax Act. Clause (28A) of Section 2 of the Income-tax Act defines 'interest' to mean ;
'interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised.'
11. It is clear from the above that 'interest' is a word of wide impact. It means 'interest payable in any manner' in respect of moneys borrowed or debt incurred and includes even service fees or other charges in respect of the moneys borrowed.
12. Treasury bills, in India, are issued by the Government of India when it requires temporary loans. They are generally issued at discount and payable in full on maturity. The sale and payment of these treasury bills is managed by the Reserve Bank of India. The State Governments ofsome of the major States also raise small-term loans by means of treasury bills. These bills generally have currency of 3 to 12 months. The treasury bills provide an excellent liquid investment for surplus funds because of their specific period of maturity and risk-free character. The treasury bills are popular with commercial banks because they do not require trading or additional endorsement to improve their value. The treasury bills occupy an important place in the investment portfolios of banks. In India, the buyers of treasury bills are almost entirely the commercial banks who invest their surplus funds in slack season in these bills. These bills are re-discounted with the Reserve Bank of India when the bankers are in need of funds. The treasury bills are sold by the Reserve Bank of India on behalf of the Central Government. The difference between the amount payable on maturity and the discounted value of the treasury bills at the time of issue is thus nothing but interest on securities.
13. It is clear from the above discussion that treasury bills are Government securities and discount on treasury bills is nothing but interest on securities.
14. We are supported in our above conclusion by communication of the Reserve Bank of India dated May 21, 1980, addressed to the Manager, Banque Nationale De Paris, Bombay, wherein, it is stated that,
'since treasury bills are initially issued at a discount and full face value is paid on maturity, the difference between these two values represents the return on investment of funds in treasury bills. While determining the rate of discount the bank takes into account the element of interest on deposits vis-a-vis the prevailing bank rate.
As regards the earnings on treasury bills, we confirm that the same can be considered as interest on Government securities since treasury bills are also a form of Government security under Section 2 of Public Debt Act, 1944.'
15. In view of the aforegoing discussion, we answer the question referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue.
16. This reference is disposed of accordingly with no order as to costs.