2015 (11) TMI 869 - SC - Income Tax

Payment of compensation to the said banks - whether is interest liable to tax under the Interest Tax Act, 1974? - interest received by various banks after bills of exchange have been discounted and a party defaults and hence has to pay compensation by way of interest as payment is made after the date stipulated in the bill of exchange - Held that - Section 2(7) itself makes a distinction between loans and advances made in India and discount on bills of exchange drawn or made in India. It is obvious that if discounted bills of exchange were also to be treated as loans and advances made in India there would be no need to extend the definition of interest to include discount on bills of exchange. Indeed, this matter is no longer res integra. The expression payable in any manner in respect of any moneys borrowed is an expression of considerable width. It will be noticed that the aforesaid language of the definition section contained in the Income Tax Act is broader than that contained in the Interest Tax Act in three respects. Firstly, interest can be payable in any manner whatsoever. Secondly, the expression in respect of includes interest arising even indirectly out of a money transaction, unlike the word on contained in Section 2(7) which, we have already seen, connotes a direct arising of payment of interest out of a loan or advance. And thirdly, any moneys borrowed must be contrasted with loan or advances . The former expression would certainly bring within its ken moneys borrowed by means other than by way of loans or advances. We therefore conclude that the Interest Tax Act, unlike the Income Tax Act, has focused only on a very narrow taxable event which does not include within its ken interest payable on default in payment of amounts due under a discounted bill of exchange. In fact, when we come to the second point agitated in some of the appeals by revenue namely as to whether guarantee fees paid to the Deposit Insurance and Credit Guarantee Corporation could be included in the definition of interest in Section 2(7) of the Interest Tax Act, 1974, it will be clear that such definition does not include any service fee or other charges in respect of monies borrowed or debt incurred, again unlike the definition of interest under the Income Tax Act. - Decided in favour of assessee.

Issues Involved:
1. Whether the compensation received by banks for delayed payment of bills of exchange is "interest" liable to tax under the Interest Tax Act, 1974.
2. Interpretation of Section 2(7) of the Interest Tax Act, 1974.
3. Analysis of conflicting High Court judgments on the matter.
4. Comparison of the definition of "interest" under the Interest Tax Act and the Income Tax Act.
5. Whether guarantee fees paid to the Deposit Insurance and Credit Guarantee Corporation can be included in the definition of interest under the Interest Tax Act, 1974.

Detailed Analysis:

1. Whether the compensation received by banks for delayed payment of bills of exchange is "interest" liable to tax under the Interest Tax Act, 1974:
The primary issue is whether the compensation received by banks for delayed payment of bills of exchange qualifies as "interest" under the Interest Tax Act, 1974. The court examined whether such compensation is "interest" on loans and advances made in India.

2. Interpretation of Section 2(7) of the Interest Tax Act, 1974:
Section 2(7) defines "interest" as interest on loans and advances made in India and includes commitment charges on unutilized portions of any credit sanctioned and discount on promissory notes and bills of exchange drawn or made in India. The definition is exhaustive, meaning no other meaning can be assigned to the term. The court emphasized that the definition of interest in the Interest Tax Act is narrow and specific.

3. Analysis of conflicting High Court judgments on the matter:
There was a sharp division among High Courts. The Karnataka High Court and the Punjab and Haryana High Court held that such compensation is chargeable to tax as interest, while the Madhya Pradesh, Kerala, Andhra Pradesh, Madras, and Rajasthan High Courts held otherwise.

- Karnataka High Court: Held that discounting of bills is a form of advance or loan and compensation for delayed payment is interest on loans and advances.
- Punjab and Haryana High Court: Reiterated the Karnataka High Court's view.
- Madhya Pradesh High Court: Held that the right to charge compensation arises from default in payment of bills, not from loans or advances.
- Kerala High Court: Stated that the amount chargeable for delayed payment of bills does not have a necessary relationship with loans and advances.
- Andhra Pradesh High Court: Emphasized that purchasing bills of exchange does not equate to advancing loans.
- Madras High Court: Followed the Kerala High Court's reasoning.
- Rajasthan High Court: Concluded that overdue interest on bills is not liable to be taxed as interest under the Interest Tax Act.

4. Comparison of the definition of "interest" under the Interest Tax Act and the Income Tax Act:
The court noted that the definition of "interest" under the Income Tax Act is broader than under the Interest Tax Act. The Income Tax Act includes interest payable in any manner in respect of any moneys borrowed or debt incurred, which is a broader concept compared to the Interest Tax Act, which focuses narrowly on interest arising directly from loans or advances.

5. Whether guarantee fees paid to the Deposit Insurance and Credit Guarantee Corporation can be included in the definition of interest under the Interest Tax Act, 1974:
The court found that the Interest Tax Act does not include service fees or other charges in respect of monies borrowed or debt incurred within its definition of interest. The Rajasthan High Court correctly observed that such charges cannot be equated to interest under the Act.

Conclusion:
The Supreme Court concluded that the compensation received by banks for delayed payment of bills of exchange is not "interest" liable to tax under the Interest Tax Act, 1974. The right to charge such compensation arises from default in payment of amounts due under discounted bills of exchange, not from loans or advances. The court dismissed the appeals of the revenue and allowed the appeals of the assessees, setting aside the judgments in favor of the revenue.

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