2004 (6) TMI 32 - HC - Income Tax

Whether Tribunal was justified in holding that the export subsidy granted to the assessee by the Reserve Bank of India does not lose the character of interest though it is not paid by the borrower and the same is therefore includible in chargeable interest under the Interest-tax Act 1974? - submission of learned counsel for the assessee was that the amount in question cannot be regarded as an interest within the meaning of section 2(7) of the Interest-tax Act 1974 We do not agree. - We answer the question referred against the assessee and in favour of the Revenue. In other words we hold that the amount received by the assessee from the Reserve Bank of India is chargeable to tax as interest.

Summary

Issues:
1. Characterization of export subsidy received by a nationalized bank from the Reserve Bank of India for extending credit to exporters as interest under the Interest-tax Act, 1974.

Analysis:
The judgment pertains to a reference made under section 256(1) of the Income-tax Act, 1961, regarding the characterization of an export subsidy received by a nationalized bank from the Reserve Bank of India. The assessee-bank received sums termed as export subsidy for extending credit to exporters at lower interest rates. The Assessing Officer held that the amount received was essentially interest and should be included in the total income for tax purposes. The Commissioner of Income-tax (Appeals) and the Tribunal upheld this decision, leading to the reference to the High Court.

The primary contention was whether the amount received by the bank should be considered an export subsidy or interest as defined under the Interest-tax Act. The Karnataka High Court's decision in a similar case was cited, where it was held that the subsidy paid by the Reserve Bank of India was indeed interest to offset the loss incurred by the bank due to charging lower interest rates. The High Court concurred with this view, emphasizing that the true character of the payment, not its label, determines its taxability. The court highlighted that the bank was not engaged in export activities, and the payment was to compensate for the interest rate difference, making it akin to interest under the law.

The court rejected the argument that the payment should not be considered interest under section 2(7) of the Act, aligning with the Karnataka High Court's ruling. It emphasized that the payment was not a subsidy for export activities but a compensation for the interest rate variance. Therefore, the court ruled that the amount received by the bank from the Reserve Bank of India should be taxed as interest, affirming the decisions of the lower authorities.

In conclusion, the High Court answered the reference against the assessee and in favor of the Revenue, holding that the amount received by the bank from the Reserve Bank of India should be treated as interest for tax purposes. The judgment underscored the importance of the payment's substance over its classification and reiterated that the nature of the payment, not its designation, determines its tax treatment.