HC adjourns UTI petition against Rs 1,100 cr IT claim

HC adjourns UTI petition against Rs 1,100 cr IT claim
PTI & EEB

FEB 26: The Mumbai High Court today adjourned until March 5 the petition filed by the Unit Trust of India (UTI) challenging notices issued by income tax department to file interest tax returns for last eight years which amount to more than Rs 1100 crore.

The petition was adjourned by Justices S H Kapadia and VC Daga as income tax department's counsel Rafiq Dada sought time to put forth his argument. UTI has contended that it was set up under a special statute. It was a mutual fund organisation and, therefore, not subject to regulations of Securities and Exchange Board of India (SEBI). It had no assets and liabilities of its own. The money contributed by unitholders was invested in schemes and returns therefrom were distributed in respective proportions.

UTI resembled a trust but it was not a trust. Whatever tax liability arose as a result of its schemes, was to be met by the unitholders. In short, UTI was a collective corpus of various investors and not a corporate body, it said.

UTI submitted that Section 32 of Unit Trust of India Act 1963 provided that it was not liable to pay any tax in respect of any income, profits or gains derived from any source. Interest earned by UTI was, in fact, income earned. When it was exempted from paying tax on income how could UTI be held liable to pay tax on interest which is treated as an income, the petition argued.

UTI said it had come out with several schemes and some of them had come to an end. There is no scheme left to which UTI could allocate or charge any interest tax which is now sought to be levied.

Meanwhile, Income Tax department is understood to have made out a strong case that Unit Trust of India (UTI) is chargeable to interest tax under the Interest Tax Act 1974, following its revival by the Finance Act 1991 and that gross interest and not just income under the head interest is the key for calculating the tax liability.

According to legal sources, UTI was brought under the purview of the Interest Tax Act following the definition of "credit institution" which was introduced with effect from October 1, 1991, sub-clause (ii) of clause (5A) of Section 2 of Interest Tax 1974.

This included public financial institutions as defined in Section 4A of the Companies' Act 1956, within the meaning of "credit institutions". Sources said that UTI became an assessee under the Interest Tax Act for the first time with effect from October 1, 1991.

The IT department stated that while making Interest Tax effective from October 1, 1991, the Finance Minister had clearly stated that Interest Tax would be levied on the gross amount of interest, and has nothing to do with the income under the head interest. The IT department has slapped a tax claim in the range of Rs 1,100 crore to Rs 1,300 crore on UTI under the Interest Tax Act.

UTI contends that Section 32 of UTI Act which was enacted in 1963 to exclude the operation of Income Tax Act 1961, Super Profit Act 1963, or any other enactment for the time being in force relating to Income Tax, super tax or any other tax on income, profits and gains from any source, was subsequently expanded to include the Wealth Tax Act 1957, and Companies' (profit) Surtax Act 1964. Thus, IT contends that the legislature specifically inserted the various Direct Tax Act in Section 32 of the UTI Act whenever it intended the UTI to be spared of the burden from their operation. However, by not inserting the Interest Tax Act in Section 32 of UTI Act, after specifically bringing UTI under "credit institutions", the legislature made its intention very clear of taxing UTI as new entities.

Further, UTI's reference to letter of CBDT dated October 10, 1991, has also been refuted by the department on the grounds that the letter was addressed to the department of economic affairs and not to UTI. It contends that the letter in question is neither an order not an instruction nor a direction issued by the CBDT.

Referring to the said letter, IT is understood to have stated that any credit institution may be exempted from the levy of Interest Tax by the Central Government only on recommendation of the Reserve Bank of India through a notification in official gazette. "Thus the letter of CBDT has no legal sanctity and is absolutely null and void and cannot be relied by UTI," legal sources said.