2008 (8) TMI 122 - HC - Income Tax

Whether the interest/penal interest, charged by the Bank, on delayed payment of installments, in recurring deposit account, by the depositor, can be subjected to levy of tax, under the provisions of Interest Tax Act, 1974 held that, it cannot be said, that the interest or penal interest, charged by the assessee, on the delayed payment of installments, by the depositors of the recurring deposit accounts, is exigible to tax, under the provisions of I.T. Act, 1974 revenue s appeal dismissed

Summary

Issues:
- Whether interest/penal interest charged by a bank on delayed payment of installments in a recurring deposit account is subject to levy of tax under the Interest Tax Act, 1974?

Analysis:
1. The judgment involves four appeals arising from three different orders of the Tribunal relating to the same assessee and two different assessment years. The main question in all appeals is whether the interest/penal interest charged by the bank on delayed payment of installments in a recurring deposit account can be taxed under the Interest Tax Act, 1974. The Tribunal found that such penal interest cannot be equated with interest on "loans and advances" as per the Act and set aside the addition made by the assessing officer and confirmed by the Commissioner.

2. The revenue argued the appeal by relying on two judgments of the Karnataka High Court, while the assessee supported the impugned judgment based on the definition of interest in Sec. 2(7) of the Interest Tax Act, 1974. The Court examined the judgments cited and found them distinguishable on facts from the present case. The definition of interest in Sec. 2(7) specifically refers to interest on loans and advances made in India, excluding other forms of interest.

3. The Court highlighted that the definition of interest in the Act is not inclusive and clearly states that interest means interest on loans and advances made in India. The Court emphasized that for the Act to apply, the interest must be received or receivable on loans and advances made in India. The legislative intent was to tax the total amount of interest received by scheduled banks on loans and advances made in India.

4. The Court rejected the argument that delayed payment of installments in a recurring deposit account should be considered a "loan or advance" and therefore subject to tax. It reasoned that the liability of the depositor to pay installments on time does not constitute an advance or loan by the bank to the account holder. The Court emphasized that in the case of a loan or advance, funds move from the lender to the borrower, which is not the case with recurring deposit accounts.

5. Consequently, the Court held that the interest or penal interest charged by the bank on delayed payment of installments in recurring deposit accounts is not exigible to tax under the provisions of the Interest Tax Act, 1974. The question was answered against the revenue and in favor of the assessee, leading to the dismissal of the appeals.