THE issues before the Bench are - Whether amount paid to the RBI/IDBI under the Industrial Development Bank of India Bill Rediscounting Scheme can be excluded from the discounting amount earned by the assessee bank on such bills from its borrowers; Whether there is a direct nexus/correlation with the payment made to the RBI/IDBI and what was received from the borrower and Whether amount paid to RBI/IDBI under the rediscounting scheme can be considered as a part of the chargeable interest under Section 2(7) of the Interest Act. And the verdict goes in favour of the assessee.
Rediscounting charges paid to RBI
The assessee bank is a subsidiary of the State Bank of India and is in the banking industry for the last several years and is involved in the activity of advancing money and receiving money from various persons. The assessee discounted various bills of its constituents (borrowers) and the discount earned on such bills was credited to discount account. The contention of the bank was that some of these bills were passed on to the RBI/IDBI for re-discounting and on such passing of the bills, the bank had to pay discount to the RBI/IDBI thus the discount earned by the bank would be the discount minus re-discount charges paid to RBI/IDBI and thus amount paid was allowable as a deduction out of the total amount earned and only net was to be considered as chargeable under the Interest Tax Act. However, the claim of the Revenue was that the said amount, which has been paid to the RBI/IDBI, was not required to be deducted as it was paid separately by the bank and there is no reason or co-relation with the discount earned on such bills.
Subsidy received from the RBI
The assessee had received subsidy from the RBI on export credit loans. It was the claim of the assessee that as per the scheme of the RBI, the assessee bank used to advance money to various exporters to carry out export business. Such advances generally are termed as packing credit and as per the scheme of the RBI, banks are required to charge interest on such advances at the specific rates provided under the said scheme. The RBI would grant subsidy to the bank for the shortfall in interest received from the customer. The counsel for the assessee contended that the latest judgment of the Delhi High Court, rendered in the case of Punjab National Bank Vs. CIT against which even the SLP was rejected by the Apex Court vide its judgment and contended that the Delhi High Court judgment has been upheld by the Hon'ble Apex Court and the issue being identical is covered in favour of the assessee.
Overdue Interest on inland/foreign demand bills
The contention of the assessee bank was that the overdue interest on inland/foreign demand bill does not form part of the interest as it is in the nature of liquidated damages or/and penalty or/and compensation and is not in the nature of interest on loans and advances made by the bank. The claim of the bank further was that it does not fall within the ambit of Sec. 2(7) of the Interest Tax Act and was out of the purview of taxability.The counsel for the assessee contended that merely because the nomenclature overdue has been indicated by the assessee, did not change the nature of receipt and real income has to be taxed and the so-called overdue interest does not fall within the ambit of Sec. 2(7) of the Interest Tax Act and it is neither a loan nor advance by the bank.
The contention of the counsel of the revenue, was that the very nature of the term ''overdue interest'', which is also credited by the assessee under the head interest sufficiently shows that it was taxable u/s 2(7) of the Act. The counsel for the Revenue further contended that the overdue interest is directly related to the advance made by the bank on the purchases of demand bills from its constituents and once the bank itself admitted that it was in the nature of overdue interest, then there is a direct nexus with the loan and advances made by the assessee bank.
Guarantee Fees Paid to Deposit Insurance and Credit Guarantee Corporation
The assessee collected guarantee commission as an incidental service charge from its constituents (borrowers) and passes the same to the Deposit Insurance and Credit Guarantee Corporation of India (DICGC) in totality. It was contended by the counsel of the assessee that the same was paid to DICGC in advance and thereafter it recovers the amount from its constituents and thus it does not fall in the nature of interest.
The Counsel of the revenue contended that whatever was recovered/charged by the assessee from the constituents (borrower) would squarely fall within the definition of interest though may be termed as guarantee commission or otherwise.
Having heard the parties, the High Court held that,
Rediscounting charges paid to RBI
++ in our view, the bank has paid amount to the RBI/IDBI under the Industrial Development Bank of India Bill Rediscounting Scheme and there is a direct nexus/correlationwith the payment made to the RBI/IDBI and what was received from the borrower. Therefore, the claim of the bank, in our view, is justifiable. There is an overriding title of the RBI/IDBI and a direct co-relation/nexus of such bills re-discounted and the re-discount rates of RBI/IDBI collected by the bank which in our view, cannot be chargeable interest, in as much as even before the said amount reached the hands of the assessee, it was impressed with the character of re-discount charges payable to the IDBI or RBI, as the case may be. The Apex Court had an occasion to consider this issue in the case of CIT Vs. Canara Bank. In view of the above, this question is no more res-integra and even counsel for the revenue conceded. Accordingly, the aforesaid question is answered in favour of the assessee and against the revenue;
Subsidy received from RBI
++ on perusal of aforesaid facts, it is clear that such subsidy is not received from the customers and is not relatable to what was lent & advanced by the bank, hence it cannot be treated as Interest as provided u/s 2(7) of the Act. Subsidy received from RBI is in the form of support to the bank and cannot be equated to interest. On close perusal of definition of interest, it is borne that only interest on loans and advances made in India is covered. Since loan and advance has not been made to RBI, thus would not come under the purview of Interest, at all. The counsel for the revenue also conceded this factum and accordingly on the above concession and issue being covered, this question is also answered in favour of the assessee-Bank and against the Revenue;
Overdue Interest on inland/foreign demand bills
++ the cardinal principle of interpretation on the fiscal laws is that it should be construed strictly. So long, the provision is free from ambiguities, there could be no need to draw an analogy and the meaning of the provision is plain and clear the person cannot be subjected to tax. The definition of interest under the Interest Tax Act is comprehensive and devoid of any ambiguity. The words employed in the said definition clearly envisage that only the interest on loans and advances is exigible to tax under the Interest Tax Act. The Apex Court has also stated in A.V. Fernandez Vs. State of Kerala the following fiscal principle. In our view, the scope and definition of the term interest cannot be interpreted to bring within its fold any income that is booked by an assessee under the head interest. The character of an overdue bill is not synonymous with the loans and advances and, therefore, it will not fall within the ambit and scope of interest u/s 2 (7) of the Interest Tax Act. The Parliament in its own wisdom has not included any amount that is recovered in the form of interest, penalty or otherwise under the definition of Interest and had it been so, such nature of amount as contended by the revenue could have been brought within the ambit and scope of interest. We are further of the view that on the due date/cutoff date whatever amount has been recovered by the assessee bank, will certainly fall in the nature of interest, but once the due date/cutoff date is over, any amount received after that date by the bank, would be in the nature of compensation/penalty/liquidated damages and will not be interest. It is well settled preposition of law that the way in which entries are made by an assessee in its books of account or the nomenclature given to a transaction by the parties is not determinative of the due character/nature of that transaction. The definition as we have pointed out of ''interest'', shall not cover the amount received by the assessee after the due date;
++ we have gone through the judgments rendered by various High Courts as quoted above 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: 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;
Guarantee Fees Paid to Deposit Insurance and Credit Guarantee Corporation
++ in our view, the term interest as defined under the Interest Tax Act is distinctive as against the term 'Interest defined under the Income Tax Act. Sec. 2(28-A) of the Income Tax Act, 1961 defines Interest. On conjoint reading of the definition of interest, which has been quoted herein above and under the Interest Tax Act in para 4, it is noticed that the Interest Tax Act, does not include the term any service fee or other 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 required to be read in between the lines. We have already observed about principles of interpretation in para 8.5 and 8.6 and mere crediting the said amount as interest will certainly not entitle the revenue to treat the same as interest. Apex Court in the case of Sutlej Cotton Mills and Godhra Electricity 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 (borrowers) is not linked to what is paid to DICGC as insurance cover on behalf of depositors, the issue is not relevant for the reason stated by us herein above.
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