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Issues involved:
The judgment involves the issue of interest tax on overdue interest of lease rental payments and hire purchase instalments u/s 10 of the Interest-tax Act, 1974 for assessment years 1996-97 and 1997-98. Summary: Issue 1: Assessment of interest tax on overdue interest: The assessee, a credit institution, did not offer overdue interest receipts for taxation purposes. The Assessing Officer issued notices u/s 10 of the Interest-tax Act, 1974, and the assessee contended that the overdue interest is not liable for inclusion in chargeable interest. The CIT(A) confirmed the Assessing Officer's order, leading to the second appeal before the ITAT. Issue 2: Interpretation of 'interest' under the Interest-tax Act: The assessee argued that interest on overdue amounts paid to them, like compensation for delayed payments on bill discounting transactions, hire purchase instalments, and lease rental payments, should not be considered interest on loans and advances under the Interest-tax Act. The ITAT analyzed the definition of 'interest' u/s 2(7) of the Act and various judicial decisions to determine the scope of chargeable interest. Decision: After considering the arguments, the ITAT concluded that only interest on loans and advances made with the purpose of financing the borrower is taxable under the Interest-tax Act. The definition of 'interest' was exhaustively analyzed, emphasizing that the term 'means and includes' indicates an exhaustive explanation of the meaning. The ITAT referred to previous decisions where compensation for delayed payments was not considered interest on loans and advances, thus not taxable. Consequently, the ITAT quashed the Assessing Officer's order and allowed the assessee's appeals. In conclusion, the ITAT ruled in favor of the assessee, holding that the overdue interest on delayed payments for bill discounting transactions, hire purchase instalments, and lease rental payments is in the nature of compensation and not taxable under the Interest-tax Act.
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