2015 (10) TMI 1521 - HC - Income Tax

Interest tax - accrual of income - whether Amount collected by the assessee bank from its borrowers as amount for interest tax, was not part of the interest on loans and advances within the meaning of section 2(7) read with section 2(5), 5 and 6 of the Interest Act, 1974 ? - Held that - Even though the amount of interest tax is recovered by the assessee from its customers, the income in actual fact never reaches the assessee, who collects it, not as a part of its income but on behalf of the Government to whom it is payable. Therefore, payment of interest tax out of the amount collected from the customers towards payment of interest tax cannot be said to be application of the income of the assessee. The additional amount charged from the assessee payable towards interest tax cannot in any manner be said to be interest which has accrued or arisen to the assessee. Therefore, such amount collected from the borrowers/customers towards payment of interest tax as expressly provided therefor by the RBI guidelines cannot be taken into consideration for the purpose of computing chargeable interest. Therefore, when the nature of the amount collected by the assessee does not fall within the ambit of chargeable interest as contemplated in subsection (5) of section 2 of the Act, the same cannot be taken into consideration while computing the chargeable interest. Consequently, the explanation to section 6 on which strong reliance has been placed by the learned counsel for the revenue would have no applicability to the facts of the present case. RBI has issued guidelines permitting the financial institutions to recover the amount payable by way of interest tax from the customers. If the amount recovered from the customers towards interest tax is also considered as chargeable interest, further interest at the prescribed rate would have to be paid by the assessee on the total amount recovered by the assessee, namely, interest on loans and advances plus the amount collected from the customer towards interest tax, which would exceed the amount collected from the customer towards interest tax, thereby frustrating the very intention of the RBI guidelines, namely, to collect interest tax from the customer and not from the bank. - Decided in favour of the assessee

Issues Involved:
1. Whether the amount collected by the assessee bank from its borrowers as interest tax is part of the interest on loans and advances within the meaning of section 2(7) read with sections 2(5), 5, and 6 of the Interest Tax Act, 1974.

Issue-wise Detailed Analysis:

1. Definition and Scope of "Interest" under the Interest Tax Act:
The central issue revolves around whether the amount collected by the assessee bank from its borrowers as interest tax forms part of the interest on loans and advances as defined under the Interest Tax Act, 1974. As per section 2(7) of the Act, "interest" means interest on loans and advances made in India, including commitment charges on unutilized portions of any credit sanctioned and discounts on promissory notes and bills of exchange drawn or made in India, but excluding specific items like interest referred to in sub-section (1B) of section 42 of the Reserve Bank of India Act, 1934, and discounts on treasury bills. The court noted that the interest tax collected from borrowers does not fit within the categories enumerated under section 2(7).

2. Computation of Chargeable Interest:
The court examined section 6 of the Act, which provides for the computation of chargeable interest and allows deductions only for interest established as bad debt. The court highlighted that the explanation to section 6 states that no deduction other than the specified one is permissible from the total amount of interest accruing or arising to the assessee. The court emphasized that what is significant are the words "interest accruing or arising to the assessee," and the additional amount collected towards interest tax does not qualify as interest accruing or arising to the assessee.

3. Nature of Amount Collected as Interest Tax:
The court considered the argument that the amount collected by the assessee from borrowers towards interest tax is not synonymous with interest collected against loans or advances. The court agreed with the assessee's contention that the amount collected was towards the payment of interest tax and not part of the interest on loans and advances. The court referred to the Supreme Court's decision in Commissioner of Income Tax v. Shitaldas Tirathdas, which distinguished between income diverted by overriding title and income applied to discharge an obligation after it reaches the assessee. The court concluded that the amount collected for interest tax never reached the assessee as its income but was collected on behalf of the government.

4. RBI Guidelines and Practical Implications:
The court also considered the RBI guidelines, which permitted banks to pass on the incidence of interest tax to their borrowers. The court noted that if the amount collected towards interest tax were considered chargeable interest, it would result in an additional tax burden on the bank, thereby frustrating the RBI's intention to collect interest tax from the customer and not from the bank.

Conclusion:
The court concluded that the Tribunal's decision to exclude the amounts collected by the assessee towards interest tax from the chargeable interest was correct. The court held that the additional amount collected towards interest tax does not fall within the definition of "interest" under section 2(7) of the Act and cannot be considered as part of the chargeable interest. The question was answered in the affirmative, in favor of the assessee, and against the revenue. The appeals were disposed of accordingly.

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