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Are RBI bonds securities?

Q: Section 80L gives extra deduction of Rs. 3,000 on interest (on any securities of the Central Government or a State government).

An Explanation provides that the expression `security' will mean a Government security as defined in Sec. 2(2) of Public Debt Act which in turn states Government security 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." A notification dated March 21, 2003 issued by the Government, Union Ministry of Finance and Company Affairs, Department of Economic Affairs reads as under:

"The Government of India hereby notifies the issue of 8 per cent savings taxable bond 2003 from April 21, 2003 until further notice".

In view of the notification issued by the Government and not merely by the Reserve Bank of India, some of us presumed that we could avail the extra deduction of Rs. 3,000 on 8 per cent interest free taxable relief bonds issued by the Reserve Bank. Kindly confirm?

A: The argument of the reader is attractive and interesting to most investors in such taxable bonds. The notification does describe it as a bond notified by the Government, while the definition of `security', the income from which is eligible for extra deduction of Rs. 3,000, requires it to be issued by the Government. The issue is whether the mere notification for the issue would cover what is issued by the RBI also as security. Probably, the notification can be understood only as an authorisation for the Reserve Bank of India to issue the bond. If the Reserve Bank is taken as a mere manager of the issue by the Government, the inference of the reader should be correct. What is the role of the Reserve Bank in case of such bonds issued by the Reserve Bank? The Reserve Bank has been created by the Reserve Bank of India Act, 1934. The RBI functions as a Central Bank acting as a banker for the Government as well as a regulatory authority with multifarious functions, as was pointed out in Reserve Bank of India v Peerless General Finance Investment Co. Ltd. [AIR 1966 SC 646], having statutory powers of its own limited only by the Constitution, when its action offends fundamental rights of the citizens or is palpably arbitrary. Though in one sense, it manages the funds of the Government, it may be difficult for the tax authorities to assume that the bonds issued by the Reserve Bank can be treated as those issued by the Government, unless there is a clarification from the Central Board of Direct Taxes conceding that these are all securities created and issued by the Government.

S. Rajaratnam

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