2022 (7) TMI 223 - HC - Income Tax

Deduction of interest charged by the Reserve Bank of India (RBI) - Appellant claimed these amounts in light of the interest charged by the Reserve Bank of India (RBI) under Section 42(3) of the R.B.I. Act - AO disallowed the deduction - whether ITAT erred in holding that the appellant was not entitled to a deduction, in computing its business income under the Act, of the interest of Rs.3.7 crores paid by it to RBI - HELD THAT - As decided in BANK OF BARODA 2011 (2) TMI 1609 - BOMBAY HIGH COURT interest paid to the RBI was not penalty and accordingly the interest expenditure is allowable - thus the question framed will have to be answered in favour of the Appellant.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal regarding deduction of interest paid to Reserve Bank of India by a Scheduled Nationalised Bank for assessment year 1990-91.

Analysis:
1. The Appellant, a Scheduled Nationalised Bank, claimed deduction of interest paid to the Reserve Bank of India (RBI) under Section 42(3) of the R.B.I. Act for the assessment year 1990-91. The Assessing Officer disallowed this deduction, leading to appeals before the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, both of which were dismissed.

2. The Tribunal, in its order, highlighted that the interest charged by the RBI for failure to maintain the Cash Reserve Ratio (CRR) cannot be considered compensatory in nature. It noted that the interest charged is penal in nature, as evidenced by the fact that those responsible for non-maintenance of CRR are liable to be punished. The Tribunal disagreed with the ITAT's view and held that the interest charged is not allowable as a deduction.

3. The Appellant cited a decision of the High Court in a similar case involving Bank of Baroda, where it was held that interest paid for non-maintenance of CRR/SLR does not constitute a penalty and is allowable as an expenditure. The High Court dismissed the Revenue's appeal, affirming that the interest paid to the RBI was not a penalty, and hence, the interest expenditure is allowable.

4. In light of the Bank of Baroda case precedent, the High Court in the present case ruled in favor of the Appellant, allowing the appeal against the order of the Income Tax Appellate Tribunal. The High Court held that the interest paid by the Appellant to the RBI is not penal in nature and is thus allowable as a deduction in computing business income under the Income Tax Act for the assessment year 1990-91.

5. The High Court allowed the appeal, directing that no costs be awarded in the matter. The judgment provides clarity on the treatment of interest paid to the RBI by Scheduled Nationalised Banks, establishing that such interest is not penal in nature and is eligible for deduction in computing business income under the Income Tax Act for the relevant assessment year.