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2011 (5) TMI 828 - HC - Income TaxInterest Tax Act, 1974 - Exclusion of interest tax recovered from the customers as chargeable to interest tax - Held that - Section 26C of the 1974 Act empowers a credit institution to vary terms of agreement with the borrowers to the extent of liability of interest tax under the 1974 Act, where the term loan had been sanctioned prior to Ist October, 1991. The ultimate destination of interest tax collected by the assessee under the 1974 Act is the Government treasury and no benefit accrues to the assessee. The receipt is infact interest tax on interest and is not in the nature of chargeable interest. Therefore, the interest tax which is collected by assessee cannot partake the character of chargeable interest which is in addition to interest paid by the customer to the assessee and no interest tax would be exigible on it. See Canara Bank (1988 - TMI - 24709 - KARNATAKA High Court - Income Tax) - Decided against the revenue.
Issues Involved:
1. Whether the amount of interest tax recovered by the assessee from its customers was chargeable to interest tax under the provisions of the Interest Tax Act, 1974. Issue-wise Detailed Analysis: 1. Chargeability of Interest Tax Recovered from Customers: The primary issue in this case is whether the interest tax amounting to Rs.1,99,89,630/- recovered by the assessee from its customers should be included in the chargeable interest under the Interest Tax Act, 1974. The assessee, a credit institution, did not include this amount in its chargeable interest declared for the assessment year 1998-99. The Assessing Officer, however, added this amount to the chargeable interest based on Section 26C of the 1974 Act. This decision was upheld by the Commissioner of Income Tax (Appeals) but was overturned by the Income Tax Appellate Tribunal, which held that the amount recovered as interest tax from customers was not chargeable to interest tax. Arguments by the Revenue: The revenue argued that under Section 26C of the 1974 Act, the interest tax recovered by the assessee should be considered chargeable interest as defined under Section 2(5) of the Act. The counsel for the revenue cited the Supreme Court's judgment in Indian Banks Association v. Devkala Consultancy Service, which interpreted Section 26C as an enabling provision allowing credit institutions to increase the agreed rate of interest to recover the interest tax liability. It was contended that this provision implied the recovered interest tax should be included in the chargeable interest. Arguments by the Assessee: The assessee's counsel argued that the Tribunal was correct in excluding the interest tax recovered from customers from the chargeable interest. The counsel referred to judgments from various High Courts, including CIT v. Bank of Madura Ltd., CIT v. State Bank of Indore, CIT v. Canara Bank, and CIT v. United Western Bank Ltd., which supported the view that interest tax recovered from borrowers does not form part of the chargeable interest under the 1974 Act. Court's Analysis and Judgment: The court examined the relevant provisions of the Interest Tax Act, 1974, including the definitions of "chargeable interest" under Section 2(5) and "interest" under Section 2(7), as well as the charging section (Section 4) and the computation provisions (Sections 5 and 6). It was noted that the chargeable interest is the total amount of interest accruing or arising to the credit institution, excluding interest on loans and advances made to other credit institutions or cooperative societies engaged in banking. The court also considered Section 26C, which allows credit institutions to vary the terms of agreements to recover interest tax from borrowers. However, it was emphasized that the ultimate destination of the interest tax collected is the government treasury, and no benefit accrues to the assessee. Therefore, the interest tax collected does not partake the character of chargeable interest. The court referred to the Bombay High Court's judgment in United Western Bank Ltd., which clarified that the Interest Tax Act applies strictly to loans and advances and not to investments. The court also cited the Madras High Court's decision in Bank of Madura Ltd., which held that interest tax recovered from borrowers does not fall under the definition of "interest" in Section 2(7) of the Interest Tax Act. Conclusion: The court concluded that the interest tax recovered by the assessee from its customers does not form part of the chargeable interest under the Interest Tax Act, 1974. Consequently, the substantial question of law was answered against the revenue and in favor of the assessee, leading to the dismissal of the appeal.
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