2018 (10) TMI 369 - HC - Income Tax

Additional finance charges as eligible to interest tax - whether additional finance charges are not in the nature of interest on loans and advances as defined under Section 2(7) of the Interest Tax Act? - Held that - The above referred substantial questions of law have been answered in favour of the assessee by the Supreme Count in the judgment reported in M/S. STATE BANK OF PATIALA VERSUS COMMISSIONER OF INCOME TAX, PATIALA 2015 (11) TMI 869 - SUPREME COURT wherein held Section 2(7) itself makes a distinction between loans and advances made in India and discount on bills of exchange drawn or made in India. It is obvious that if discounted bills of exchange were also to be treated as loans and advances made in India there would be no need to extend the definition of interest to include discount on bills of exchange. Indeed, this matter is no longer res integra. - Decided in favour of the assessee and against the Revenue

Summary

Issues:
1. Eligibility of additional finance charges to interest tax
2. Nature of additional finance charges under Section 2(7) of the Interest Tax Act

Analysis:
1. The appeal questioned the eligibility of additional finance charges to interest tax for the assessment year 1998-99. The Supreme Court's judgment in (2016) 383 ITR 0244 (SC) favored the assessee, as similar issues were addressed previously in T.C.A.No.1148 and 1149 of 2008 by the High Court. The interpretation of Section 2(7) of the Interest Tax Act was crucial in determining the inclusion of additional finance charges under the definition of interest on loans and advances made in India.

2. The Court referenced the case of Commissioner of Income Tax vs. Cholamandalam Investment & Finance Co. Ltd. (2008) 296 ITR 0601, where the exclusion of additional discount charges from chargeable interest under the Interest Tax Act was upheld. Furthermore, judgments like Commissioner of Income-tax vs. Bank of Rajasthan Ltd. [2010] 323 ITR 524 (Rajasthan) and Commissioner of Income-tax vs. State Bank of Indore [1988] 172 ITR 24 (MP) supported the notion that certain charges, like penal interest, may not be taxable under the Act.

3. The High Court of Karnataka's decision in State Bank of Mysore vs. Commissioner of Income-tax (1989) 175 ITR 607 (Kar.) highlighted that interest represents damages or compensation for delayed payments, emphasizing that any amount collected by a bank, regardless of nomenclature, is chargeable interest under the Interest Tax Act. The Supreme Court's ruling in State Bank of Patiala vs. Commissioner of Incometax, Patiala (2016) 383 ITR 244 (SC) clarified the distinction between loans and advances and discounts, reinforcing that interest must arise directly from a loan or advance to be taxable under the Act.

4. The broader definition of "interest" under the Income Tax Act compared to the Interest Tax Act was emphasized, indicating that the latter focuses on a narrow taxable event that excludes interest payable on default in payment of amounts due under a discounted bill of exchange. Consequently, the Tribunal's order was deemed incorrect, leading to the allowance of the assessee's appeals and setting aside the Tribunal's order in I.T.A.No.28/2002 dated 14.10.2005.