1989 (5) TMI 145 - AT - Income Tax

Summary

Issues:
1. Computation of chargeable interest under the Interest Tax Act.
2. Consideration of interest paid to Agricultural Refinance & Development Corporation and Industrial Development Bank of India in determining chargeable interest.
3. Interpretation of refinancing schemes by ARDC and IDBI as integrated transactions.
4. Exclusion of interest paid to ARDC and IDBI from chargeable interest.
5. Treatment of interest received from Co-operative Land Development Bank.
6. Claim of bad debt write-off for the assessment year 1979-80.

Detailed Analysis:
1. The judgment concerns the computation of chargeable interest under the Interest Tax Act for a scheduled bank. The dispute arose when the IAC (Assessment) determined the chargeable interest higher than the amount declared by the bank. The bank contended that interest paid to ARDC and IDBI should be considered in determining chargeable interest.

2. The CIT (Appeals) and the revenue authorities disagreed on whether interest paid to ARDC and IDBI should be deducted from chargeable interest. The bank argued that the refinancing schemes by ARDC and IDBI should be viewed as integrated transactions, and only the net interest derived should be taxed. The revenue contended that the interest charged by the bank on lending activities should be taxable, irrespective of the refinancing transactions.

3. The agreements between the bank and ARDC/IDBI outlined the conditions for refinancing, including stipulations on interest rates, repayment schedules, and security arrangements. The tribunal concluded that the bank's role was that of a participant in an overall scheme controlled by ARDC and IDBI, necessitating consideration of the entire transaction as one integrated process. Therefore, only the net interest accrued to the bank should be subject to tax.

4. Regarding interest received from Co-operative Land Development Bank, the CIT (Appeals) accepted the bank's argument that such interest should be excluded from chargeable interest as it was assessed under the head 'Income from security' in the Income Tax Act. The tribunal upheld this decision, rejecting the revenue's appeal.

5. The issue of bad debt write-off for the assessment year 1979-80 was also addressed. The Directors of the bank had decided to write off a bad debt, which was reflected in the accounts for the relevant year. The tribunal affirmed the CIT (Appeals) decision to allow the bad debt write-off, emphasizing that the debt had been established as bad in the previous year and written off before the annual general body meeting.

6. In conclusion, the tribunal allowed the bank's appeals and dismissed the revenue's appeals, affirming the treatment of interest paid to ARDC and IDBI, interest received from Co-operative Land Development Bank, and the bad debt write-off for the specified assessment years.