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TMI Blog1996 (10) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... of credit institutions, such as the present assessee-bank, including co-operative societies, engaged in the business of banking, public financial institutions, State financial institutions and financial companies. The provisions of the Act would reveal that these credit institutions are engaged in the business of providing finance by way of making loans, advances or otherwise and as such earn the interest income which becomes chargeable to tax and such interest income includes commitment charges and discount on promissory notes and bills of exchange. It is also seen that in the case of interest earned by such credit institutions even with regard to loans and advances made to another credit institution, however, it does not assume the legal character of chargeable interest. Under the provisions of section 5 of the Act, the chargeable interest is required to be of the previous year of the credit institution and additionally the said amount of chargeable interest is also required to be accruing or arising to the credit institution in that previous year. The very character of the credit institution would show that the activity is engagement in providing credit facilities to the borro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard to the service rendered by the bank in regard to the bill and its subsequent collection is called " exchange " and such amount is classified in the accounts by the bank under a separate head called " exchange " in contra distinction to the amount earned on usance bill which is included under " interest and discount ". Section 32 of the Negotiable Instruments Act (Act 26 of 1881), relating to the liability of the maker of the note as well as of the acceptor of the bill also makes the position clear in terms of the legal terminology in the context that the maker of the note is bound to pay the amount on maturity as well as the acceptor of the bill of exchange is also bound to pay the amount thereof to the holder on demand. The said provision also specifies the position in the event of the default of such payment making it statutorily clear that such maker or acceptor is bound to compensate any party to the note or bill for any loss or damage sustained by him and caused by such default. Thus, the relevant statutory provision characterises the amount demanded and collected by the bank in the event of the default in regard to overdue bills as compensation sustainable in the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable in the context would show that the origin of the amount which is the subject-matter of an overdue bill gets snapped. In other words, the moment the maker presents the overdue bill to the bank for recovery, it becomes a document negotiable in itself on its own strength empowering the bank to effect recovery and creating the liabilities of the parties as regards prompt payment thereof. In such a situation, ignoring the intermittent acrobatics as to whether the amount can be understood as interest or could continue to have the character of its description as compensation in accordance with the provisions of section 32 of the Negotiable Instruments Act, 1881, would be wholly unnecessary, at least for the purpose of consideration as to whether the amount can assume the character of " chargeable interest ". It is elementary in the context that taxation liability has to be understood and established and unless this is apparent from the material on record, the imposition of tax does not get justified. In other words, unless the amount which is sought to be chargeable as the chargeable interest has any necessary relationship with loans and advances, such an attempt to understand th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m, such an understanding would not be permissible to determine the taxation liability insisting its inevitable and inseparable connection with loans and advances. The first question would therefore get answered in the affirmative, against the Revenue and in favour of the assessee. This takes us to consider the second question as to whether the interest earned on refinancing operations is to be excluded in the matter of levy under the Interest-tax Act, 1974. Learned counsel for the parties have placed before us the Industrial Development Bank of India Refinance Scheme. It is seen therefrom that the Industrial Development Bank of India has been operating a scheme for granting refinance against term loans sanctioned by the eligible credit institutions such as banks to the industrial concerns for setting up of industrial projects and for their expansion, modernisation and diversification schemes. Such industrial concerns include village, tiny, small and medium scale industries and such others which could be commonly understood as credit institutions eligible. The needy industrial concerns have to approach the eligible credit institutions for getting term loans for financing their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gation to pass on whatever is collected and received from the borrowers. A further probe relating to the repayment of refinance (see clause 2(i)), emphasising that repayment of refinance is to the Industrial Development Bank of India and is to be made in the same proportion as the refinance bears to the loan. The Industrial Development Bank of India Refinance Scheme has been placed before us to appreciate, in the context, as to whether it could be said, in accordance with the statutory provisions, that there is any facet of the interest amount in question having the character of the " chargeable interest " or, in other words, whether it could be considered as interest income of the assessee-bank, in the language of section 5 of the Act as accruing or arising to the credit institutions in the concerned previous year. The obvious situation is that if the assessee, as the credit institution, is only to collect and pass it over to the Industrial Development Bank of India, then obviously the amount in question will not satisfy the character that it is interest income which accrued to the credit of the assessee the credit institution. Our examination of the scheme that is placed befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that under the bill rediscounting scheme, when the bills were re-discounted by the assessee-bank, there was an overriding title of the Industrial Development Bank of India and thereunder the assessee has to part with a portion of the discounting charges. It is held that the amounts payable to the Industrial Development Bank of India could never be held to be exigible to tax under the Interest-tax Act. The Tribunal has relied on the same decision. The Madhya Pradesh High Court has, in turn, sought reliance from the decision of the Calcutta Bench of the Tribunal. It is not necessary, in view of the considered decision of the Madhya Pradesh High Court, as pointed out above. To the same effect, learned senior tax counsel placed before us the decision of the Karnataka High Court in CIT v. Canara Bank [1989] 175 ITR 601, to take the view that the rediscounting of the bills by the assessee-bank with the Industrial Development bank of India cannot be considered as a separate transaction because the assessee-bank had to pay it to the Industrial Development Bank of India in accordance with the scheme. We have seen the scheme ourselves along with the factual matrix of the proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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