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Issues Involved:
1. Whether the amounts collected at the rate of seven per cent. of the interest on loans and advances are interest within the meaning of section 2(7) of the Interest-tax Act, 1974. 2. Whether the Tribunal was right in holding that only what is paid as per contract will be interest and what is paid voluntarily by the debtor is not interest. Summary: Issue 1: Definition of Interest u/s 2(7) of the Interest-tax Act, 1974 The primary issue was whether the amounts of Rs. 7,27,292 for the assessment year 1975-76 and Rs. 19,69,989 for the assessment year 1976-77, collected at the rate of seven per cent. of the interest on loans and advances, qualify as "interest" u/s 2(7) of the Interest-tax Act, 1974. The assessee, a non-nationalised banking company, collected these amounts from its borrowers to cover the tax levied by the Interest-tax Act, 1974. The Department argued that this collection is in substance interest on loans and advances, while the assessee contended that it is not interest but a separate levy to cover the tax payable by the bank. The Tribunal held that the amount collected is not interest within the meaning of "interest" u/s 2(7) of the Interest-tax Act, as it is not interest on loans and advances but interest on interest. Issue 2: Voluntary Payment vs. Contractual Obligation The Tribunal classified the amounts into two categories: amounts paid voluntarily by the debtors and amounts paid as part of the contract. It held that only amounts paid as per the terms of the contract are considered interest, while voluntary payments are not. The Department contended that the seven per cent. collected is related to the borrowing by the borrower and should be considered interest. However, the Tribunal concluded that the collection does not fall under the definition of interest u/s 2(7) of the Interest-tax Act. Judgment: The High Court upheld the Tribunal's decision, stating that the seven per cent. amount collected by the assessee-bank does not fall under the definition of "interest" as stated in section 2(7) of the Interest-tax Act. The Court reasoned that the collection was made to cover the tax payable by the bank and was credited under a separate head "Special tax accounts." The Court also noted that there is no prohibition for the bank to collect this tax amount from its borrowers. The principle of diversion by overriding title was discussed, and it was concluded that since the amount collected reached the hands of the assessee-bank before being paid as tax, it does not qualify for diversion by overriding title. The Court answered the questions referred to it in the affirmative and against the Department, with no costs and counsel's fee fixed at Rs. 1,000.
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