2018 (12) TMI 1518 - HC - Income Tax

Interest chargeable to Interest Tax or not - Minimum guarantee charges received by the assessee from companies to whom financial assistance is given - ITAT held minimum guarantee charges received by the assessee from companies to whom financial assistance is given is not 'interest' chargeable to Interest Tax - whether Tribunal was right in holding that the financial assistance is not a loan or advance but an investment? - Held that - Revenue would submit that the Tribunal, in its impugned order, followed the decision of the Allahabad High Court in the case of CIT Vs. Sahara India Savings and Investment Corporation Ltd. 2003 (9) TMI 74 - ALLAHABAD HIGH COURT . The said decision has been upheld by Hon'ble Supreme Court 2009 (11) TMI 25 - SUPREME COURT OF INDIA in the decision and the substantial question of law has been answered in favour of the assessee as held Interest-tax Act is attracted only in respect of interest on loans and advances and the additional discount charges which is an amount given as a premium, would not attract the provisions of the Interest-tax act. The Tribunal is therefore correct in excluding additional discount charges from the chargeable interest under the Interest-tax Act.

Summary

Issues:
Appeals by Revenue against ITAT order - Common issues of minimum guarantee charges and financial assistance classification.

Analysis:
The appeals by Revenue were against the ITAT order concerning minimum guarantee charges and financial assistance classification. The substantial questions of law revolved around whether the minimum guarantee charges received were interest chargeable to Interest Tax and whether financial assistance constituted a loan or an investment. The Revenue argued that the charges collected by the assessee fell within the inclusive definition of interest under the Interest Tax Act. They contended that regardless of the name under which the charges were collected, they pertained to loans and advances extended by the assessee, thus falling within the definition of interest. The case law of Sahara India Savings and Investment Corporation Ltd. was cited to support this argument.

The Tribunal's decision was challenged based on previous judgments. The Division Bench had previously ruled in the case of Cholamandalam Investment & Finance Co. Ltd. that additional discount charges did not attract the provisions of the Interest Tax Act. Moreover, in the case of Bank of Rajasthan Ltd., it was held that penal interest charged on delayed payments was not taxable under the Interest Tax Act. Similarly, the State Bank of Indore case established that amounts charged for delayed payments were not considered interest on advances. The High Court of Karnataka's ruling in State Bank of Mysore v. CIT emphasized that any amount collected by a bank, regardless of nomenclature, constituted interest for the purpose of the Interest Tax Act.

The Supreme Court's decision in State Bank of Patiala v. CIT, Patiala clarified the distinction between loans and advances and discounts. It highlighted that interest was chargeable under the Interest Tax Act only if it directly arose from a loan or advance. The Income Tax Act's broader definition of interest payable in any manner in respect of borrowed moneys contrasted with the narrower scope of the Interest Tax Act. The Court concluded that interest payable on default in payment under a discounted bill of exchange was not covered by the Interest Tax Act.

Ultimately, the Tribunal's order was deemed incorrect in light of the aforementioned decisions. As a result, the appeals filed by the Revenue were dismissed, the substantial questions of law were answered in favor of the assessee, and the CIT(A)'s order was restored. No costs were awarded in the case.