2006 (9) TMI 109 - HC - Income Tax

Amount of liquidated damages received by the assessee (bank) by way of compensation on account of delay in payments beyond the days of grace is interest includible in the chargeable interest for the calculation of interest tax - held that discounting of bills is a form of advance or loan and hence compensation paid on delayed payment of money due thereon is interest on loans and advances - we answer the question in favour of the Revenue and against the assessee

Summary

Issues involved:
Interpretation of whether liquidated damages received by the assessee constitute interest for the purpose of calculation of interest tax under the Interest-tax Act, 1974.

Detailed Analysis:
1. The primary issue in this case revolves around determining whether the liquidated damages received by the assessee on account of delay in payments beyond the days of grace should be considered as interest for the purpose of calculating interest tax under the Interest-tax Act, 1974. The specific question referred to the High Court was whether the Appellate Tribunal was correct in holding that the said damages were not includible in the chargeable interest for interest tax calculation.

2. The assessee, a subsidiary of State Bank of India, contended that the amounts received as liquidated damages were in the nature of "damages" and not "interest," hence should not be taxed under the Act. However, the Assessing Officer disagreed, considering the amounts as interest based on the entries in the books of account. The disputed amounts for various assessment years were provided in the judgment.

3. The Commissioner of Income-tax (Appeals) reversed the Assessing Officer's view, but the Tribunal upheld the initial stance, leading to the matter being referred to the High Court for adjudication.

4. The interpretation of the term "interest" under Section 2(7) of the Act was crucial in resolving the issue. The section defines interest to include various components related to loans and advances but excludes specific types of interest. The Karnataka High Court had previously addressed a similar issue in State Bank of Mysore v. CIT, where it was held that discounting of bills constitutes a form of advance or loan, and any compensation paid on delayed payment is considered interest on loans and advances.

5. The High Court, concurring with the Karnataka High Court's view, emphasized that interest serves as compensation for delayed payment of money due, and the expression 'compensation' in the Negotiable Instruments Act includes interest paid for such delays. The Court highlighted that discounting of bills is akin to lending, and any amount collected for delayed payment, regardless of nomenclature, should be treated as interest under the Interest-tax Act.

6. Ultimately, the High Court ruled in favor of the Revenue and against the assessee, affirming that the liquidated damages received were indeed to be considered as interest for the purpose of interest tax calculation. The Court's decision aligned with the interpretation that discounting of bills represents a form of lending, and any compensation for delayed payments should be categorized as interest under the Act.

In conclusion, the judgment clarified the classification of liquidated damages received by the assessee as interest for interest tax calculation purposes, based on the nature of discounting bills and the compensation for delayed payments in the banking context.