1985 (9) TMI 128 - AT - Income Tax

Summary

Issues Involved:

1. Whether the interest on the whole of the borrowings granted by the Apex Bank to the District Co-operative Central Banks (Central Banks) towards financing seasonal agricultural operations of small and marginal farmers is entitled to exemption under the Government notifications.
2. Interpretation of the notifications issued under section 28 of the Interest-tax Act, 1974.
3. Determination of the chargeable interest for the assessment year 1976-77.

Issue-wise Detailed Analysis:

1. Exemption of Interest on Borrowings:

The core dispute is whether the interest on the entire borrowings granted by the Apex Bank to the Central Banks for seasonal agricultural operations qualifies for exemption under the Government notifications. The assessee contended that the entire interest amount of Rs. 2,01,20,550 received from the Central Banks should be exempt from interest-tax, arguing that the exemption notification covers the whole interest on borrowings. Conversely, the revenue argued that only the rebate portion of the interest qualifies for exemption. The Tribunal concluded that the exemption only applies to the rebate portion of the interest, not the entire interest on the borrowings.

2. Interpretation of Notifications Under Section 28:

The Tribunal analyzed the notifications issued under section 28 of the Interest-tax Act, 1974. The assessee argued that the phrase "which qualifies for rebate" describes the borrowings, implying that the entire interest on such borrowings should be exempt. The revenue, supported by an RBI clarification, contended that the phrase describes the interest, meaning only the rebate portion of the interest is exempt. The Tribunal agreed with the revenue, stating that the notifications should be read in the context of the circumstances leading to their issuance. The Tribunal emphasized that the exemption was intended only for the rebate portion of the interest, as recommended by the RBI.

3. Determination of Chargeable Interest:

For the assessment year 1976-77, the total interest income of the assessee was Rs. 2,45,56,120, out of which Rs. 2,01,20,550 was from borrowings by the Central Banks. The Income Tax Officer (ITO) determined that only Rs. 25,18,171 of the interest qualified for exemption, resulting in a chargeable interest of Rs. 2,20,37,947. The Commissioner, in his revisionary order, adjusted the chargeable interest by excluding the rebate interest for July 1974. The Tribunal upheld the ITO's and Commissioner's findings, confirming that only the rebate portion of the interest qualifies for exemption.

Conclusion:

The Tribunal dismissed the appeals, concluding that the exemption under section 28 and the relevant notifications applied only to the rebate portion of the interest, not the entire interest on the borrowings. The Tribunal emphasized a strict interpretation of the exemption provisions, aligning with the intent and recommendations of the RBI.