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TMI Blog1987 (8) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... n India. The banks would be expected to adjust their functioning to this tax and reimburse themselves to the extent necessary by making appropriate adjustments in interest rates charged from borrowers. The proposed tax will have both a monetary and a fiscal impact in that it will serve the purpose both of raising the cost of borrowed funds and of supplementing Government revenues. The proposed tax will be levied at the rate of 7 per cent of the gross amount of interest earned by the banks. This would imply on an average increase of about 1 per cent in the cost of borrowings from the banks." The Memorandum explaining the Act and the Rules thereunder states as follows : "The Act imposes a special tax on the gross amount of interest receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount the impact of the Interest-tax Act, 1974 it has since been decided to allow the commercial banks to increase their lending rates to primary agricultural credit societies by one per cent with effect from the 1st March, 1976." 3. The Bank of Madura Ltd. issued a circular to its branches explaining the impact of the interest-tax Act and instructed them as follows : -" In our Bank the 7 per cent tax is leviable on the interest on loans and advances and interest and discount on Local Bills discounted, Usance Bills discounted, Bills purchased clean and Bills purchased documentary. 4. The tax is to be debited/recovered at the rate of 7 per cent at the time of every quarterly interest application or closing of the relevant account whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cretion to the Managers also. The branches also were instructed to advise the borrowers in the form of notification given below :-- "In view of the 7 per cent tax payable by us to Government of India on Interest received on advances as from 1-8-1974 and the continuing tight money conditions, please note that the interest rate on your .... account has been raised to... per cent per annum with effect from 1-8-1974." The accounting procedure followed by these banks were as follows :--" At the time of charging interest to parties' accounts--Dr. Party's account, Cr. Interest account; At the end of each half year - Dr. Interest account, Cr. Provision for interest tax; At the time of payment of interest tax Dr. Provision for interest tax, Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee happened to maintain the accounts but should depend upon the real nature of the receipt which according to the assessee was only reimbursement of the tax element as indicated by the Finance Minister in his speech. Reliance was placed on the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co Ltd. v. CIT [1971] 82 ITR 363. It was also pointed out that the enhancement was just sufficient to leave with the assessee the interest income after payment of the interest tax and, therefore, it did not involve any accrual of interest to the assessee or appropriation of any amount of the tax component to itself as the assessee had to make over the same within the prescribed period. On the other hand, it was contended on behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But the assessees seek to avoid the charge by pointing out that the increases was because of the imposition of the Interest-tax Act and as indicated by the Finance Minister himself in his speech just sufficient to cover the impact of the charge. Yet, it is one thing to collect the tax separately as was done by the Bank of Madura Ltd., and it was quite another thing to increase the tax by so much as to keep back an amount which is free of tax. In the case of Bank of Madura Ltd. the additional amount collected was an amount of 0.7 per cent calculated on the interest already charged whereas in the present cases the additional amount collected was additional interest @ 1 per cent which is itself significant. Secondly, the amount collected by B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax. So, if a seller offers goods for sale, it is for him to quote a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up, or whether the seller has included tax or not." Following this dictum, the Supreme Court has held in the case of Sinclair Murray Co. (P.) Ltd. that.the sales tax collected by a dealer formed part of the trading receipts. On the same analogy we have to hold that the enhanced interest collected by these banks formed part of its interest earned and could not be considered to represent the tax liability and be excluded from the chargeable interest. We have, therefore, to reject the claim of the assessee-banks and confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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