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TMI Blog2015 (11) TMI 869X X X X Extracts X X X X X X X X Extracts X X X X ..... here are 25 appeals that have been posted for hearing before us. They are concerned primarily with interest that is received by various banks after bills of exchange have been discounted by them and a party defaults and hence has to pay compensation by way of interest as payment is made after the date stipulated in the bill of exchange. The precise question that arises before us is whether such payment of compensation to the said banks is "interest" liable to tax under the Interest Tax Act, 1974. 3. The facts in all the cases are similar. The bank makes purchases of bills of exchange from its customers and charges commission thereon for services rendered by it. The discounted bills so purchased are then presented to the parties concerned for realization. If on presentation the bill is realized within time, no charges are levied by the bank. In case the bills are not realized in time but the other party pays the value of the bill beyond the stipulated time, a certain amount in the form of interest is charged by the bank on a fixed percentage basis for every day of default. This amount is credited by the bank in its interest account. 4. On these broad facts there is a sharp cleavag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs which the clause declares that they shall include. The words "means and includes", on the other hand, indicate "an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expressions". (See : Dilworth v. Commissioner of Stamps [1899 AC 99, 105-106 : (1895-9) All ER Rep Ext 1576] (Lord Watson); Mahalakshmi Oil Mills v. State of A.P. [(1989) 1 SCC 164, 169 : 1989 SCC (Tax) 56]" [at para 19] 8. The precise question that arises before us is whether compensation that can be traced to Section 32 of the Negotiable Instruments Act, 1881 can be regarded as interest on loans and advances. Section 32 of the Negotiable Instruments Act states as follows:- "Section 32. Liability of maker of note and acceptor of bill. In the absence of a contract to the contrary, the maker of a promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively, and the acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand. In default of such payment as aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and interest by way of damages, still the provisions of Income Tax Act are not attracted since what can be brought within the purview of the Act is only interest on loans and advances. The amount charged by the assessee on delayed payment of bills cannot be held to interest on loans and advances and it was not exigible to tax under the Interest Tax Act. He also relied upon Sec. 32 of the Negotiable Instruments Act and contended that the said provision contemplates only compensation and not the interest at all. When the Bank discounts a bill what happens is the drawee gets a credit from the Bank to the extent of the amount covered by the Bill. This position has been explained in LAW OF BANKING By Paget, 9th Edition at page 415 thus: "The discount of a bill is the purchase of it with, normally, a right of recourse and for a sum less than its face value. The discounter is free to deal with the Instrument as he pleases. Discount is a negotiation. Other things being equal there is no practical or legal distinction between the ordinary negotiation of a bill and its being discounted except in the sum paid on it. Discounting is a means of lending as is pledge." It is stated in Byl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee did not, therefore, arise on account of any delay in repayment of any loan or advance made by the assessee. That right accrued on account of default in the payment of the bills. It may be that the amount payable by way of compensation for detention of a sum of money due, can be said to be covered by the expression "interest" in its widest sense, including both interest proper and interest by way of damages. But the provisions of the Interest-tax Act are attracted only in the case of interest on loans and advances. The amount charged by the assessee for delayed payment of bills cannot be held to be "interest on loans and advances". In our opinion, therefore, the Tribunal was not right in holding that the amounts in question charged by the assessee for delayed payment of bills were in the nature of interest on advances and exigible to tax under the Interest-tax Act." [at page 28] The Kerala High Court in Commissioner of Income Tax vs. State Bank of Travancore, [1997] 228 ITR 40 (Ker), in arriving at the same conclusion as the Madhya Pradesh High Court, has, however, adopted a different line of reasoning in the following terms:- "These overdue bills are presented to the bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace, the purported transaction comes to be governed by Section 32 of the Negotiable Instrument Act. The basic transaction of borrowing and lending is required to be between the persons described as "maker" and "acceptor" under Section 32 of the Negotiable Instrument Act. The person who purchased the Bills of Exchange becomes the "bearer" thereof. Section 32 of the Negotiable Instrument Act, defines the liability of the concerned persons to discharge their respective obligations. However, it is difficult to imagine that the purchaser of the Bills of Exchange can be treated as a person who has advanced the loans, to the original borrower. For all practical purposes a different transaction altogether, comes into existence." The Madras High Court in Commissioner of Income Tax v. Cholamandalam Investment and Finance Co. Ltd., [2008] 296 ITR 601 (Mad ) has simply followed the Kerala High Court's view, and the Rajasthan High Court in a judgment dated 12.11.2014, which is the impugned judgment in Civil Appeal No.4988 of 2015, has reasoned thus:- "The assessee-bank got right to charge the amount for the delay in payment of bills accrued to the assessee by virtue of the provisions of Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve and are not in conformity with the view of Karnataka and Punjab and Haryana High Court and we concur with the view of Madhya Pradesh & Kerala High Court. Recently the Telangana and Andhra Pradesh High Court also had an occasion to consider the same issue in the case of CIT Vs. State Bank of Hyderabad: (2014) 367 ITR 128 and after considering the same issue, as is being examined by this Court and have come to the conclusion that the amount received after due date is not in the nature of interest. Accordingly, in our view, the amount received as "overdue interest" in inland/foreign demand bills is not liable to be taxed as interest under the Interest Tax Act and we answer this question in favour of the assessee and against the revenue." We are of the view that the Karnataka High Court's reasoning is fallacious for the simple reason that 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different from "discounts" and the legislature has kept in mind the difference between the two. It is clear therefore that the right to charge for overdue interest by the assessee banks did not arise on account of any delay in repayment of any loan or advance made by the said banks. That right arose on account of default in the payment of amounts due under a discounted bill of exchange. It is well settled that a subject can be brought to tax only by a clear statutory provision in that behalf. Interest is chargeable to tax under the Interest Tax Act only if it arises directly from a loan or advance. This is clear from the use of the word "on" in Section 2(7) of the Act. Interest payable "on" a discounted bill of exchange cannot therefore be equated with interest payable "on" a loan or advance. This being the case, it is clear that the reasoning contained in the High Courts which differ from the Karnataka view is obviously correct but for the reasons given by us. 17. It will be interesting to notice at this stage that the expression "interest" is also defined under the Income Tax Act. Section 2(28A) defines interest as follows:- "2. Definitions.--- In this Act, unless the context ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charges in respect of money charge or debt incurred." under its ambit and putting to test the principle of harmonious interpretation, it is evident that the parliament in its wisdom has chosen not to add the aforesaid terminology under the Interest Tax Act, and what has not been mentioned neither be added nor is 22 required to be read in between the lines. We have already observed about principles of interpretation in para 8.5 and 8.6 (supra) and mere crediting the said amount as interest will certainly not entitle the revenue to treat the same as interest. Hon'ble Apex Court in the case of Sutlej Cotton Mills and Godhra Electricity (supra) have clearly expressed that mere crediting the amount under a head is not determinative of the real nature and real intent and purpose of the transaction is required to be seen. Therefore, we hold that the amount recovered by the assessee from the constituents (borrower) cannot be taxed as interest in the hands of the assessee. On perusal of definition, it is distinctively clear that such charges recovered by the bank cannot be equated to the term interest under the Act. Though the receipt of Guarantee Fees received from constituents (borrow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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