2007 (7) TMI 11 - SC - Income Tax

Interest tax Department contended that rediscounting charges represented the assessee interest income and rediscounting charges were taxable as chargeable interest Held that department contention is not correct

Summary

Issues:
Interpretation of rediscounting charges under the Bills Rediscounting Scheme by IDBI for tax purposes.

Analysis:
The primary issue in this judgment revolves around whether the rediscounting charges received by the assessee-bank from IDBI should be considered as part of chargeable interest under the Interest-tax Act, 1974. The Department contended that these charges represented Interest Income of the assessee and should be taxable. However, the Tribunal held that the amount did not accrue to the assessee due to the diversion of discount through overriding title in favor of IDBI. The crux of the matter lies in the interpretation of the Bills Rediscounting Scheme introduced by IDBI in 1965, which aimed to provide financial assistance to manufacturers of indigenous machinery by offering deferred payment facilities to buyers.

The Scheme allowed nationalized banks to rediscount bills discounted by them with IDBI. Under the Scheme, the discounting bank, like the assessee, could not charge discount rates higher than prescribed by IDBI. The responsibility for payment to IDBI rested primarily on the seller's bank, which in this case was the assessee-bank. The Tribunal reasoned that the assessee-bank merely acted as a medium for the disbursement of the development fund under the Scheme, and the amount received was impressed with the character of rediscounting charges payable to IDBI. Therefore, the Tribunal concluded that the rediscounting charges collected by the assessee-bank could not be considered as chargeable interest under the 1974 Act. The judgment emphasizes that the transaction should be viewed in its entirety, and it is not feasible to bifurcate the amount received by the assessee-bank.

In light of the above analysis, the Supreme Court ruled in favor of the assessee-bank and against the Department, affirming that the rediscounting charges did not form part of chargeable interest. The judgment provides a detailed explanation of the Bills Rediscounting Scheme and its implications on the tax treatment of rediscounting charges, highlighting the specific provisions and obligations under the Scheme that influenced the Court's decision.