INTEREST ON LOANS AND ADVANCES UNDER BILLS REDISCOUNTING SCHEME FROM BANKS TO WHICH BANKING REGULATION ACT APPLIES IS NOT CHARGEABLE TO TAX.

[Mr. M. GOVINDARAJAN]

                        Before going to the discussion of the problem enumerated in the topic we may see some of the definitions in the Interest Tax Act, 1974 (‘Act’ for short).  Section 2(7) of the Act, defines the term ‘interest’ as interest on loans and advances made in India and includes-

(a)    commitment charges or unutilized portion of at any credit sanctioned for long being availed of in India; and

(b)   discount on promissory notes and bills of exchange drawn or made in India, but does not include-

(i)                 interest referred to sub-section (1B) of Section 42 of the Reserve Bank of India Act, 1934;

(ii)               discount on treasury bills.

Sec. 2(1) of the Act defines the term ‘assessee’ as a person by whom interest tax or any other sum of money is payable under this Act and includes-

(a)    every person in respect of whom any proceeding under this Act has been taken for the assessment of his chargeable interest or of the amount or refund due to him or of the chargeable interest of any other person in respect of which he is assessable or of the amount of refund due to such other person;

(b)   every person who is deemed to be an assessee in default under any provision of this Act.

Section 5 of the Act deals with the scope of chargeable interest.   Section 5 provides that subject to the provisions of this Act, the chargeable interest of any previous year of a credit institution shall be the total amount of interest (other than interest on loans and advances made to other credit institutions) accruing or arising to the credit institution in that previous year.  Any interest in relation to categories of bad or doubtful debts referred to in Section 43D of the Income Tax Act shall be deemed to accrue or arise to the credit institution in the previous year in which it is credited by the credit institution to its profit and loss account for that year or, as the case may be, in which it is actually received by the credit institutions, whichever is earlier.

                        Sec.6 of the Act deals with the computation of chargeable interest.   Sec. 6 provides that in computing the chargeable interest of a previous year, there shall be allowed from the total amount of interest (other than interest on loans and advances made to credit institutions) accruing or arising to the assessee in the previous year, a deduction in respect of the amount of interest which is established to have become a bad debt during the previous year.  Such interest has been taken into account in computing the chargeable interest of the assessee of an earlier previous year and the amount has been written off as irrecoverable in the accounts of the assessee for the previous year during which it is established to have become a bad debt.  The explanation to this section provides that in computing the chargeable interest of a previous year, no deduction, other than the deduction specified in this section shall be allowed from the total amount of interest accruing or arising to the assessee.

                        Then we have to see the definition of ‘credit institution’.  Section 2(5A) of this Act defines the term ‘credit institution’ as-

(i)                 a  banking company to which Banking Regulation Act, 1949 applies (including any bank of banking institution referred to in Section 51 of that Act) or a co-operative society engaged in carrying on the business of banking not being a co-operative society providing credit facilities to farmers or village artisans;

(ii)               a public financial institution as defined in Section 4A of the Companies Act, 1956;

(iii)             a State Financial Corporation established under Section 3 or Section 3A or an institution notified under Section 46 of the State Financial Corporations Act, 1951; and

(iv)             any other financial company.

Now we may discuss the issue with a decided case law in ‘National Insurance Co. Ltd V. Commissioner of Income Tax and another’ – 2011 -TMI - 204610 – (CALCUTTA HIGH COURT) In this case the appellant company is engaged in the business of insurance other than that of life insurance.  It is categorized as Public Financial Institution under Section 4A of the Companies Act.  It is also engaged in the investment activities like purchase and sale of shares, debentures, bonds, Government Securities etc.,  It also provides various types of loans and advances to different companies as well as credit institutions under different schemes like term loans, loans under bill discounting scheme, loans by way of deposits as call money loans against mortgage of property loans to the State Governments for housing and firefighting equipment etc.,

                        The appellant filed its return of chargeable interest for the previous financial year ending 31.03.1992 on December, 28, 1994, declaring its chargeable interest under the Interest Tax Act as the sum of Rs.5213378 after claiming exemption from levy of interest tax as not forming part of the chargeable interest in respect of various items including the sum of Rs.169765816 representing interest on bills rediscounting scheme with banks as per details given in three statements.   The Assessing Officer held that interest on call money and bills rediscounting could not be termed as interest on loans and advances and accordingly held such interest to be part of chargeable interest.

                        The appellant went before the Commissioner of Income Tax (Appeals) against the order of Assessing Officer.  The appellate authority upheld the order of the Adjudicating authority holding that call money and interest on bills rediscounting scheme with banks could not be termed as interest on loans and advances and that those were rightly included by the Assessing Officer in the appellant’s chargeable interest computed under Section 5 read with Section 6 of the Act.  The Tribunal, on the file of the appeal by the appellant, held that call money did not fall within the ambit of chargeable interest, but so far the interest on bills rediscounting scheme with banks were concerned, the same was chargeable as interest.

                        Being dissatisfied the appellant filed the present appeal before the High Court.    The only question that was considered by the High Court is whether interest received by the appellant under the bills rediscounting scheme from different banking companies to which the Banking Regulation Act, 1949 applies should form part of chargeable interest within the meaning of Section 2(5) read with Section 5 and 6 of the Act.    The High Court found that there is no dispute that the appellant is a credit institution being a public financial institution as defined under Section 4A of the Companies Act,1956.  The High Court held that interest received by the assessee under bills rediscounting scheme from different banking companies to which the Banking Regulation Act, 1949 applies is also interest within the meaning of the Act.  However as provided in Section 5 of the Act, chargeable interest for the purpose of the Act does not include all the interest received by a credit institution and it specifically excludes the interest on loans and advances made to other credit institutions accruing or arising to the credit institution in that previous year.  Similarly in Section 6 of the Act, providing mode of computation of the chargeable interest, the Legislature has explicitly excluded interest on loans and advances made to credit institutions.

                        Thus the High Court held that the interest received by the assessee on loans and advances made under the bills rediscounting scheme from different banking companies to which the Banking Regulation Act, 1949 applies does not form part of chargeable interest defined under the Act and no tax is payable on such amount.