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TMI Blog2015 (10) TMI 1521X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the types of advances. Therefore, whatever interest is charged from the borrowers will be part of the chargeable interest. The incidence of alleged interest tax passed on to the borrowers resulted into the additional charging of interest and not interest tax. Thus, the interest remained to be interest on loans and advances and, therefore, it formed part of the chargeable interest. According to the Commissioner (Appeals), neither the Act nor the guidelines of the RBI state that the nature of such enhanced interest would cease to be interest. It is well settled law that an entry by an accountant cannot change the nature of the income. Thus, a different treatment given by the bank to the enhanced interest charged in its books of account cannot change the nature of this accrual. 6. The Tribunal, after appreciating the material on record, has found that the facts of the present case are identical to the facts of the case of Commissioner of Income Tax v. Bank of Madura Limited, (1995) 215 ITR 928 and has directed that the amounts of ₹ 4,26,05,914/- and ₹ 5,41,84,851/- be deducted from the amounts of chargeable interest returned by the assessee. 7. Assailing the impugne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection of the amount of interest tax is concerned, because of the overriding title of the Government. It was, accordingly, urged that the view adopted by the Tribunal being just, legal and proper and does not warrant interference by this court. 9. In rejoinder, Mr. M. R. Bhatt, learned counsel for the appellant pointed out that in the facts of the present case, the assessee had offered the total amount of tax as interest and hence the entire amount is required to be taken into consideration while computing the chargeable interest. As regards the contention of the learned counsel for the assessee that the assessee was merely an agent because of overriding title of the Government, reference was made to the decision of the Madras High Court in the case of Bank of Madura Limited (supra) to point out that the theory of diversion at source has not been accepted by that court. It was further submitted that in the case of Bank of Madura Limited (supra), the court has not considered the Explanation to section 6 of the Act which provides for that no deduction other than that specified in that sub-section shall be allowed from the total amount of interest accruing or arising to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de - (i) interest referred to in sub-section (1B) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); (ii) discount on treasury bills; 12. Thus, interest as provided under sub-section (7) of section 2 of the Act, means interest on loans and advances made in India inclusive of the categories enumerated thereunder. A perusal of the categories mentioned thereunder clearly shows that interest tax collected from borrowers does not find place therein. As noticed earlier, the amount payable towards interest tax has been collected from the borrowers/customers in view of the guidelines issued by the RBI. In the opinion of this court, it is the interest on the loans and advances made by the assessee inclusive of the categories mentioned in section 2(7) of the Act which would be the interest charged by the assessee on such loans and advances and the additional amount recovered from the customers towards payment of interest tax, which does not fall within the ambit of the expression interest as defined under the said sub-section, cannot be said to be interest on the loans and advances made by the assessee. 13. A perusal of the scheme of the Act reveals that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest tax in view of the overriding title of the Government does not accrue to the assessee. According to the learned counsel for the revenue since the amount is firstly received by the assessee and thereafter paid over to the Government, the same amounts to application of income of the assessee. In this regard, it may be germane to refer to the decision of the Supreme Court in the case of Commissioner of Income Tax v. Shitaldas Tirathdas, (1961) 41 ITR 367, wherein it was held that the true test as to whether there is diversion of income by overriding title is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge on obligation after such income reaches the assessee, the same c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. From the facts as emerging from the record, it is manifest that the interest which accrues or arises to the assessee bank is the interest chargeable on the loans and advances to the extent agreed between the parties. As discussed hereinabove, 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. 16. Another aspect of the matter is that the RBI has issued guidelines permitting the financial in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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