2014 (12) TMI 65 - HC - Income Tax

Amount paid on rediscounting of bills part of interest or not Interest tax Act - Activity of advancing and receiving money from various parties - Whether the Tribunal was justified in holding that amount paid by the assessee to the IDBI, RBI on rediscounting of bills are not part of interest income and as such not chargeable to interest tax Held that - The bank has paid amount to the RBI/IDBI under the Industrial Development Bank of India Bill Rediscounting Scheme and there is a direct nexus/corelation with the payment made to the RBI/IDBI and what was received from the borrower - the claim of the bank is justifiable - There is an overriding title of the RBI/IDBI and a direct co-relation/nexus of such bills re-discounted and the re-discount rates of RBI/IDBI collected by the bank which in our view, cannot be chargeable interest, in as much as even before the amount reached the hands of the assessee, it was impressed with the character of re-discount charges payable to the IDBI or RBI, as the case may be the same has also been decided in CIT Vs. Canara Bank 2007 (7) TMI 11 - SUPREME COURT OF INDIA decided against revenue. Subsidy received from the RBI on export credit loans - Whether the Tribunal was justified in law in holding that the amount of subsidy received by the assessee from RBI under the Export Credit (Interest Subsidy), 1968 is not liable to interest tax Held that - Assessee rightly contended that as per the scheme of the RBI, the assesse bank used to advance money to various exporters to carry out export business - Such advances generally are termed as packing credit and as per the scheme of the RBI, banks are required to charge interest on such advances at the specific rates provided under the scheme -The RBI would grant subsidy to the bank for the shortfall in interest received from the customer - such subsidy is not received from the customers and is not relatable to what was lended & advanced by the bank, hence it cannot be treated as Interest as provided u/s 2(7) of the Act - Subsidy received from RBI is in the form of support to the bank and cannot be equated to interest - only interest on loans and advances made in India is covered - Since loan and advance has not been made to RBI, thus would not come under the purview of Interest, at all Decided against Revenue. Overdue Interest on inland/foreign demand bills - Whether the Tribunal was right in law in holding that overdue interest charged by the bank was chargeable amount under the Interest Tax Act Held that - The scope and definition of the term interest cannot be interpreted to bring within its fold any income that is booked by an assessee under the head interest - The character of an overdue bill is not synonymous with the loans and advances and, therefore, it will not fall within the ambit and scope of interest u/s 2 (7) of the Interest Tax Act - on the due date/cutoff date whatever amount has been recovered by the assessee bank, will certainly fall in the nature of interest, but once the due date/cutoff date is over, any amount received after that date by the bank, would be in the nature of compensation/penalty/liquidated damages and will not be interest - the way in which entries are made by an assessee in its books of account or the nomenclature given to a transaction by the parties is not determinative of the due character/nature of that transaction - the amount received as overdue interest in inland/foreign demand bills is not liable to be taxed as interest under the Interest Tax Act Decided against revenue. Guarantee Fees Paid to Deposit Insurance and Credit Guarantee Corporation - Whether the Tribunal was justified in holding that the guarantee fee/commission shown by the assessee itself under the head of interest is not liable to tax under the Interest Tax Act Held that - The Interest Tax Act, does not include the term any service fee or other charges in respect of money charge or debt incurred under its ambit and putting to test the principle of harmonious interpretation, it is evident that the parliament in its wisdom has chosen not to add the terminology under the Interest Tax Act, and what has not been mentioned neither be added nor is required to be read in between the lines in Sutlej Cotton Mills Limited Versus Commissioner of Income-Tax, West Bengal 1978 (9) TMI 1 - SUPREME Court it has been held that mere crediting the amount under a head is not determinative of the real nature and real intent and purpose of the transaction is required to be seen - the amount recovered by the assessee from the constituents (borrower) cannot be taxed as interest in the hands of the assessee - such charges recovered by the bank cannot be equated to the term interest under the Act - Though the receipt of Guarantee Fees received from constituents (borrowers) is not linked to what is paid to DICGC as insurance cover on behalf of depositors, the issue is not relevant Decided against revenue.

Summary

Issues Involved:

1. Re-discount paid to RBI/IDBI.
2. Subsidy received from RBI.
3. Overdue interest on inland/foreign demand bills.
4. Guarantee fees paid to Deposit Insurance and Credit Guarantee Corporation (DICGC).

Detailed Analysis:

Issue 1: Re-discount paid to RBI/IDBI

The primary issue was whether the amount paid by the assessee to the IDBI and RBI on rediscounting of bills is part of interest income and chargeable to interest tax. The assessee-bank argued that the discount earned on bills should be considered net of re-discount charges paid to RBI/IDBI. The court noted a direct nexus between the discount earned and the re-discount charges paid. The Supreme Court in CIT Vs. Canara Bank (2007) held that rediscounting charges collected by the assessee-bank cannot be "chargeable interest" under section 2(7) of the Interest Tax Act, 1974, since the amount is impressed with the character of rediscounting charges payable to IDBI. Consequently, the court answered this question in favor of the assessee and against the revenue.

Issue 2: Subsidy received from RBI

The next question was whether the subsidy received by the assessee from the RBI under the Export Credit (Interest Subsidy) Scheme, 1968, is liable to interest tax. The court observed that the subsidy is not received from customers and is not related to loans and advances made by the bank. The subsidy from RBI is a form of support and does not constitute interest under section 2(7) of the Act. The Delhi High Court in Punjab National Bank Vs. CIT (2011) held similarly, and the Supreme Court upheld this view. Therefore, the court ruled this question in favor of the assessee and against the revenue.

Issue 3: Overdue interest on inland/foreign demand bills

The court examined whether overdue interest on inland/foreign demand bills is chargeable under the Interest Tax Act. The assessee argued that overdue interest is in the nature of liquidated damages or compensation, not interest on loans and advances. The court noted that the relationship of borrower and lender ends on the due date, and any amount received after that is compensation or penalty, not interest. The court agreed with the views of the Madhya Pradesh and Kerala High Courts, which held that overdue interest is not taxable as interest under the Interest Tax Act. Thus, this question was answered in favor of the assessee and against the revenue.

Issue 4: Guarantee fees paid to Deposit Insurance and Credit Guarantee Corporation (DICGC)

The final issue was whether the guarantee fee/commission shown by the assessee under the head of interest is liable to tax under the Interest Tax Act. The assessee contended that the guarantee commission is an incidental service charge passed on to DICGC and does not constitute interest. The court highlighted the difference in the definition of interest under the Income Tax Act and the Interest Tax Act, noting that the latter does not include service fees or other charges. The Supreme Court in Sutlej Cotton Mills Ltd. Vs. CIT and Godhara Electricity Company Ltd. Vs. CIT held that the true nature of the transaction must be considered, not merely the entries in the books of accounts. Therefore, the court ruled that the amount recovered as guarantee fees is not taxable as interest under the Interest Tax Act, answering this question in favor of the assessee and against the revenue.

Conclusion:

All four questions were decided in favor of the assessee bank and against the revenue. The appeals/references were disposed of with no order as to costs.