2014 (8) TMI 428 - HC - Income Tax

Interest Tax - Overdue interest on the demand bills - Whether the Tribunal is correct in holding that the overdue interest on the demand bills is not chargeable to tax under the Interest Tax Act, 1974 Held that - The transactions on which tax was ordered to be levied are in the nature of purchase of Bills of Exchange - It is not uncommon that banks purchase Bills of Exchange from their customers and make payments, on being satisfied that they are in order - the Act covers just the interest on loans and advances, it is difficult to bring under its fold, the transaction of purchase of Bills of Exchange - Had the Parliament been of the view that a transaction purchase of bills of exchange is on par with the transactions of loans and advances and wanted to levy tax on every amount that is recovered in the form of interest, penal or otherwise, it would have certainly included such transactions in the definition clause or in the other charging sections - That is not have been done, the assessing authority cannot be permitted to widen the scope of the Act Decided against Revenue.

Summary

Issues:
1. Whether overdue interest on demand bills is chargeable to tax under the Interest Tax Act, 1974?

Analysis:
The case involved a reference made by the Income Tax Appellate Tribunal regarding the chargeability of overdue interest on demand bills to tax under the Interest Tax Act, 1974. The respondent, a Nationalised Bank, engaged in various activities including lending loans and purchasing bills of exchange. The Income Tax Officer treated the overdue interest on demand bills as covered by the Act and subjected them to tax. Appeals were made to the Commissioner and then to the Tribunal, which held that the amounts representing overdue interest on demand bills are not liable to be taxed under the Act. The Revenue disagreed and filed applications for reference to the High Court.

The main contention was whether the amount recovered by a lender towards overdue interest on demand bills is taxable under the Act. The Act specifically defines interest as interest on loans and advances made in India. The Tribunal held that the Act is restrictive in nature and only covers interest on loans and advances, not interest on other transactions like bills of exchange. The Tribunal's decision was based on the fact that the Act does not explicitly include transactions involving bills of exchange in its definition of taxable interest. The Tribunal found that the purchase of bills of exchange by banks does not fall under the Act's scope of taxable interest on loans and advances.

The High Court agreed with the Tribunal's interpretation, stating that if the Parliament intended to tax transactions involving bills of exchange, it would have explicitly included them in the Act's definition clauses or charging sections. Since the Act only covers interest on loans and advances, the High Court concluded that the assessing authority cannot expand the Act's scope to include transactions like the purchase of bills of exchange. Therefore, the High Court affirmed the Tribunal's decision that overdue interest on demand bills is not chargeable to tax under the Interest Tax Act, 1974.