2016 (8) TMI 228 - HC - Income Tax

Interest payable to NHB on financing scheme - amount on this account considered chargeable under the Interest Tax Act by the Assessing Officer was directed to be deleted by the CIT(A) confirmed by ITAT - Held that - Tribunal is justified in dismissing the claim of the revenue inasmuch as whatever is collected by the Bank has to be passed over to the NHB and it is in the nature of repayment with regard to the money advanced by NHB alone and therefore in such a situation the concerned amount cannot have the legal requirement of Chargeable Interest as it cannot be said that on the said amount interest has accrued. Similarly, so far as EMI is concerned, the Tribunal is right in holding that after selling and transferring the loan portfolis the assessee has no right over the same but by virtue of agreement it is entitled to receive agreed percentage of interest component of each EMI towards the service of collection and rendering them to HDFC. Therefore the amount received is not in nature of interest but in the nature of service charges and therefore the same cannot be subjected to interest tax. Therefore we answer both the questions in favour of assessee and against the revenue. Amount being processing fees, reimbursement charges and damage charges and interest portion of lease rental deleted from the chargeable interest - Held that - The expenses such as processing fees, damage charges, verification charges, reimbursement charges and lease rent etc are expenses and they cannot be added to the income. The character of the receipts above is not synonymous to interest on loans and advances. Thus, we are of the view that the Tribunal has rightly answered the questions in favour of assessee and against the revenue.

Issues Involved:
1. Deletion of interest paid to National Housing Bank (NHB) from chargeable interest.
2. Exclusion of processing fees, reimbursement charges, and damage charges from chargeable interest.
3. Exclusion of interest portion of lease rental from chargeable interest.
4. Penal interest not considered as chargeable interest.
5. Interest on inter-corporate deposits not included in chargeable interest.
6. Exclusion of interest on debentures and bonds from chargeable interest.

Detailed Analysis:

1. Deletion of Interest Paid to NHB from Chargeable Interest:
The High Court examined whether the Appellate Tribunal was correct in law and on facts in confirming the CIT(A)’s order to delete ?17,67,67,067/- being interest paid to NHB from chargeable interest. The Tribunal’s decision was based on the precedent set by the Kerala High Court in the case of Commissioner of Income Tax vs. State Bank of Travancore. The court concluded that the interest payable to NHB on financing schemes should not be included in chargeable interest as the bank acts merely as a collecting agent, passing on the repayments to NHB. This interpretation aligns with the provisions of the Interest Tax Act, which does not consider such interest as accruing to the credit institution. The court upheld the Tribunal's decision, confirming that the amount in question does not meet the legal requirement to be 'chargeable interest'.

2. Exclusion of Processing Fees, Reimbursement Charges, and Damage Charges from Chargeable Interest:
The court evaluated whether the Tribunal was correct in confirming the CIT(A)’s deletion of ?14,33,592/- being processing fees, reimbursement charges, and damage charges from chargeable interest. The court referenced the Supreme Court’s decision in State Bank of Patiala vs. Commissioner of Income Tax, which clarified that such fees and charges do not constitute interest under the Interest Tax Act. The court agreed with the Tribunal's view that these charges are not synonymous with interest on loans and advances and should not be added to the income, thus ruling in favor of the assessee.

3. Exclusion of Interest Portion of Lease Rental from Chargeable Interest:
The court considered whether the Tribunal rightly confirmed the CIT(A)’s deletion of ?51,78,071/- being the interest portion of lease rental from chargeable interest. The court noted that the assessee, being the owner, earns lease income which cannot be classified as interest income. The Supreme Court’s broader definition of interest under the Income Tax Act does not apply here. The court upheld the Tribunal’s decision, confirming that lease rentals are not chargeable interest under the Interest Tax Act.

4. Penal Interest Not Considered as Chargeable Interest:
The court addressed whether penal interest of ?21,63,653/- should be included in chargeable interest. Citing the Supreme Court’s decision in State Bank of Patiala, the court affirmed that penal interest does not qualify as chargeable interest. The Tribunal’s decision to exclude penal interest from chargeable interest was upheld.

5. Interest on Inter-Corporate Deposits Not Included in Chargeable Interest:
The court reviewed whether interest on inter-corporate deposits should be included in chargeable interest. Following the precedent set by the Supreme Court in the same case, the court ruled that such interest does not fall under the purview of chargeable interest as defined by the Interest Tax Act. The Tribunal’s decision to exclude this interest was confirmed.

6. Exclusion of Interest on Debentures and Bonds from Chargeable Interest:
The court examined whether the Tribunal was correct in setting aside the issue of ?84,28,337/- being interest on debentures and bonds to the file of the Assessing Officer. The court referenced multiple high court decisions, including those from Punjab and Haryana, Bombay, Madras, and Karnataka, which consistently held that rediscounting charges and similar interests do not accrue to the assessee bank and thus are not chargeable interest. The Tribunal’s decision to exclude this interest was upheld.

Conclusion:
The High Court answered all the questions in favor of the assessee and against the revenue, confirming the Tribunal's orders. The court ruled that the amounts in question, including interest paid to NHB, processing fees, reimbursement charges, damage charges, interest portion of lease rentals, penal interest, and interest on inter-corporate deposits and debentures, do not constitute chargeable interest under the Interest Tax Act. The Tribunal's decisions were affirmed, and no costs were ordered.

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