2005 (5) TMI 264 - AT - Income Tax

Summary

Issues Involved: Computation of interest tax liability by the assessee bank, inclusion of interest tax in the gross interest, and application of the correct multiplication factor for computing the interest tax liability.

Issue-wise Detailed Analysis:

1. Computation of Interest Tax Liability:
The primary issue in these appeals revolves around the method used by the assessee, a Nationalized Bank, to compute its interest tax liability. The bank computed the interest tax liability by multiplying the gross interest by 2/102 (3/103 for assessment year 1997-98) instead of 2/100 (3/100 for assessment year 1997-98). The bank argued that the interest collected from borrowers was inclusive of interest tax, and therefore, the interest tax liability should be computed using the factor of 2/102 (3/103 for assessment year 1997-98).

2. Inclusion of Interest Tax in Gross Interest:
The assessee contended that the interest tax collected from borrowers was included in the interest amount and should not be considered as part of the chargeable interest. The bank further argued that as per the agreement with borrowers, the interest tax burden was to be borne by the borrowers, and thus, the gross interest income was inclusive of the interest tax recovered.

3. Application of Correct Multiplication Factor:
The Assessing Officer (AO) did not accept the assessee's explanation and computed the interest tax liability by applying a factor of 2/100 (3/100 for assessment year 1997-98) to the gross interest earned. The CIT(A) upheld the AO's decision, stating that the interest tax recovered from customers formed part of the interest earned and should be included in the chargeable interest. The CIT(A) also referenced the Supreme Court decision in the case of Mcdowell & Co. Ltd. v. Commercial Tax Officer, which supported the view that any liability discharged by customers on behalf of the assessee forms part of the total amount earned.

4. Arguments by the Assessee:
The assessee argued that the interest tax levied under the Interest-tax Act, 1991, was allowed to be reimbursed by making necessary adjustments in the interest rates charged from borrowers. The assessee relied on the Finance Minister's Budget Speech for 1991-92 and the Supreme Court decision in Moti Lal Chhadami Lal Jain v. CIT, which held that income diverted before reaching the assessee is deductible. The assessee also cited the Madras High Court decision in the case of Bank of Madura Ltd., where it was held that the interest tax collected by the bank from borrowers did not fall under the definition of "interest" as per section 2(7) of the Interest-tax Act, 1974.

5. Arguments by the Revenue:
The Revenue argued that the gross amount of interest declared by the assessee in its return of interest was conclusive, and the AO was correct in charging interest tax on the declared amounts. The Revenue also pointed out that the Finance Minister's speech clearly stated that the interest tax was to be levied on the gross amount of interest received. The Revenue contended that the decision of the Madras High Court in Bank of Madura Ltd. was not applicable as it was rendered in the context of the Interest-tax Act, 1971, whereas the present case involved the Act of 1994.

6. Tribunal's Decision:
The Tribunal considered the rival submissions and the relevant material on record. It noted that the Finance Minister's speech clearly indicated that the interest tax was to be levied on the gross amount of interest. The Tribunal observed that the banks and financial institutions were allowed to reimburse themselves for the interest tax by adjusting their interest rates charged from borrowers. However, this adjustment did not imply grossing up the interest rate by including the interest tax. The Tribunal also noted that the assessee's circular specifying interest rates on advances indicated that interest tax was charged separately over and above the normal interest rate.

The Tribunal found that the facts in the case of Bank of Madura Ltd. were different, as the interest tax collected by the bank was credited to a separate account and paid over to the Government. In contrast, the assessee in the present case collected interest tax as part of the interest from borrowers. The Tribunal concluded that the assessee's claim for applying a multiplication factor of 2/102 (3/103 for assessment year 1997-98) was not in accordance with the law. The Tribunal upheld the CIT(A)'s decision, which supported the AO's computation of interest tax liability using the factor of 2/100 (3/100 for assessment year 1997-98).

Conclusion:
The appeals of the assessee were dismissed, and the Tribunal upheld the orders of the CIT(A), confirming the computation of interest tax liability by applying the multiplication factor of 2/100 (3/100 for assessment year 1997-98) to the gross amount of interest.