Whether interest earned on bill discounting with credit institutions is to be included in interest income u/s 2(7) - NO: High Court

THE issue before the Bench is - Whether interest earned on bill discounting with credit institutions would be included in interest income u/s 2(7). And the answer is NO.

Facts of the case

The assessee, a Government of India undertaking, was engaged in the business of general insurance. Pursuant to the return filed by assessee, an assessment order was passed u/s 8(2) computing chargeable interest at Rs.3,84,84,910/-. Subsequently, notice u/s 10 was issued and a return of chargeable interest of Rs.3,92,51,082/- was filed. By an order, AO added certain

amounts to the chargeable interest. The additions were made subject matter of challenge before the appellate authorities, including the Tribunal, who had substantially deleted several additions, but in respect of interest on call money with bank and interest on bills re-discounting scheme, the matter was restored to the AO. The remand order was passed to determine the nature of interest. By an order AO referred to definition of the term "interest" in Section 2(7) to hold that the aforesaid amounts had to be treated as interest under the said Section and rejected the contention of assessee relying upon Section 2(5A)(1). This order of AO had attained finality. AO thereafter initiated penalty proceedings u/s 13 and levied penalty of Rs.44,42,839/- in respect of the above two additions. On appeal, CIT(A) had deleted the said penalty after referring to several facts. On further appeal, Tribunal had had affirmed the aforesaid finding of CIT(A).

Before HC, the Revenue's counsel had contented that clause (b) of section 2(7) was not omnibus but stipulates that that the discounting on promissory notes and bills of exchange drawn or made in India would be treated as "interest" on loans and advances for the purpose of Section. Thus, with effect from 1st Oct, 1991 there was no doubt or ambiguity that bill discounting charges on promissory notes or bills of exchange have to be included in the interest for the purpose of tax payable under the Act. However, when the appeal had come up for hearing, counsel for the assessee, had submitted that the present case does not include interest earned on discounting of promissory notes or bills of exchange. He had mentioned that the term used was "interest from banks-bills re-discounting scheme". At the request of the counsel for Revenue, the appeal was adjourned to enable her to ascertain the details and know the correct position. It was further stated that copy of the scheme was probably not filed by the assessee during the course of the assessment proceedings and was not available on the record. It was submitted that earlier similar contention was not raised. It was apparent from the assessment orders that the assessee had relied on Section 2(5A)(1) to contest that interest under the Banks Bills Rediscounting Scheme amounting to Rs.8,74,28,57/- cannot be subjected to tax u/s 2(7). The amount so stated had accrued on transactions with RBI. The AO disagreed, observing that for Section 2(5A)(1), to apply, the transaction should be with a credit institution, which meant a banking company to which Banking Regulation Act, 1994 applied. However ,the RBI, was a statutory authority; the Central Bank, constituted under a special enactment. The RBI was neither a bank nor a banking company and hence cannot be treated as a credit institution. In other words, the AO held that in case interest had been earned on the same transactions but with the scheduled banks, it would have been exempt u/s 2(5A)(1), but as the transactions were with the Central Bank, i.e., RBI, the income or interest earned would be taxable. The stand of assessee, that u/s 2(7) interest means interest on loans and advances and, therefore, necessarily refers to commercial transactions entered into by the assessee, was rejected. The submission, that the definition of interest had been expanded to include discount on promissory notes and bills of exchange, but it was not the legislative intention to tax interest earned on transactions with Reserve Bank of India as they did not partake or have a commercial character, was not accepted.

Held that,

++ in the case of CIT-IV versus Fortis Financial Services Limited, decided on 5th July, 2012, 2012-TIOL-490-HC-DEL-IT and it was held that Section 13 stipulates that penalty can be imposed when an assessee has furnished inaccurate particulars of interest or concealed particulars of chargeable interest. The Section does not use the word 'deliberately', 'willful' or 'willfully'. However, the Section does not have any explanation as in the case of Section 271(1)(c) of the Income Tax Act, 1961. To this extent the two provisions are not para materia. The net effect is that in the absence of "Explanation" the onus will not shift to the assessee. The purport and purpose behind Explanation to Section 271(1)(c) as explained in several decisions, is to shift the onus and impose an obligation on the assessee to prove and establish the reason/cause, and in case of failure to bonafidely elucidate and satisfy their conduct, penalty can be imposed under Section 271(1)(c) of the Income Tax Act. The Explanation raises a presumption which has to be rebutted by the assessee. In the absence of Explanation, the presumption or the shifting of onus does not take place but this does not mean that penalty cannot be imposed where an assessee has furnished inaccurate particulars or concealed particulars of chargeable interest. The word 'conceal' means to hide or to keep secret. As held in Law Lexicon, the said word is derived from the latin word 'concelare' which implies 'con' & 'celare' to hide. It means to hide or withdraw from observation; to cover or keep from sight; to prevent discovery of; to withhold knowledge of. However, the words 'inaccurate particulars' are much broader and wider. The word 'inaccurate' in Webster's Dictionary has been defined as 'not accurate; not exact or correct; not according to truth; erroneous; as inaccurate statement, copy or transcript'. The word 'particular' means detail or details, details of a claim or separate items of an account [see CIT vs. Reliance Petroproducts Pvt. Ltd. 2010-TIOL-21-SC-IT. The said part applies when an assessee furnishes inaccurate detail or details or a claim or a separate item of account. It is settled that when two legal interpretations were plausible and there was honest and bona fide difference of opinion, penalty for concealment/furnishing of inaccurate particulars, should not and cannot be imposed. If the view taken by the assessee required consideration and was reasonably arguable, he should not be penalized for taking the position. The tax statutes are complex and there can be a bona fide difference of opinion on legal interpretation and understanding of a provision. In such cases, even when the interpretation placed by the Revenue is accepted, penalty should not be imposed if the contention of the assessee was plausible and bona fide. Of course full facts should be disclosed;

++ the SC in Reliance Petroproducts & Anr., examined their earlier judgment in the case of Union of India vs. Dharmendra Textile Processors, 2008-TIOL-192-SC-CX-LB and it has been held that a glance at this provision would suggest that in order to be covered, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The present is not a case of concealment of the income. That is not the case of the Revenue either. However, the counsel for Revenue suggested that by making incorrect claim for the expenditure on interest, the assessee has furnished inaccurate particulars of the income. As per Law Lexicon, the meaning of the word "particular" is a detail or details (in plural sense) ; the details of a claim, or the separate items of an account. Therefore, the word "particulars" used in the section 271(1)(c) would embrace the meaning of the details of the claim made. It is an admitted position in the present case that no information given in the return was found to be incorrect or inaccurate. It is not as if any statement made or any detail supplied was found to be factually incorrect. Hence, at least, prima facie, the assessee cannot be held guilty of furnishing inaccurate particulars. The counsel argued that "submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income". We do not think that such can be the interpretation of the concerned words. The words are plain and simple. In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. In CIT v. Atul Mohan Bindal 2009-TIOL-97-SC-IT, where this court was considering the same provision, the court observed that the Assessing Officer has to be satisfied that a person has concealed the particulars of his income or furnished inaccurate particulars of such income. This court referred to another decision of this court in Union of India v. Dharamendra Textile Processors 2008-TIOL-192-SC-CX-LB as also, the decision in Union of India v. Rajasthan Spg. & Wvg. Mills 2009-TIOL-63-SC-CX and reiterated that it goes without saying that for applicability of section 271(1)(c), conditions stated therein must exist;

++ it is, equally well settled that establishment of mens rea is not the requirement or a condition precedent to impose penalty. The question of mens rea etc. is important and relevant in the criminal proceedings but not for the purpose of civil penalty under Section 13 of the Act. The nature and character of the two proceedings is different. Presence of mental element or mens rea in most criminal proceedings is mandatory unless the legislature mandate is to the contrary but not so in the penalty proceeding under Section 13 of the Act. The earlier view that penalty proceedings were quasi criminal in nature and require establishment and proof of mens rea, has been discarded/disapproved in the judgment of the Supreme Court in Dharmanedra Textile Processor's case. In the said decision, the view expressed in Dalip N. Shroff vs. JCIT 2007-TIOL-96-SC-IT, was overruled and after referring to series of decisions in Director of Enforcement vs. MCTM Corpn. (P) Ltd. (1996)2 SCC 471, JK Industries Ltd. vs. Chief Inspector of Factors & Boilers, (1996) 6 SCC 665, R.S. Joshi vs. Ajit Mills Ltd. (1977) 4 SCC 98, Gujarat Travancore Agency vs. CIT (1989) 3 SCC 52, Swedish Match AB vs. SEBI (2004) 11 SCC 641, the legal principle that a penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is far different from the penalty for a crime or a fine or forfeiture provided as punishment for the violation of criminal or penal laws. The Supreme Court in Union of India vs. Rajasthan Spinning & Weaving Mills 2009-TIOL-63-SC-CX, had examined Section 11AC of the Central Excise Act, 1994 and keeping in view the express language of the said Section has observed that the word "deliberately' used therein was significant and requires mens rea. Explaining the said decision, the Supreme Court in CIT, Delhi vs. Atul Mohan Bindal, 2009-TIOL-97-SC-IT, has held that the said decision was confined to the particular Section i.e. Section 11AC of the Central Excise Act, 1944 in view of the peculiar and distinguishable words used therein. When we apply the aforesaid parameters to the factual matrix of the present case in relation to interest on Banks-Bills Re-discounting Scheme, we do not think the Tribunal has erred in upholding the order of the CIT(Appeals) in deleting the penalty. Counsel for assessee has also drawn our attention to the decision of the Calcutta High Court in the case of National Insurance Company Limited versus CIT and Another, 2011-TIOL-388-HC-KOL-IT wherein it was held that Section 2(5) would override and interest earned on bill discounting with credit institutions would not be included in interest under Section 2(7). We also record that the counsel for the respondent-assessee has placed before us decision of the Tribunal in Income Tax Appeal Nos.11/Cal./1997 and 18/Cal./1999 in respect of Assessment Years 1992-93 and 1995-96 in the case of National Insurance Company Limited, Kolkata versus DCIT wherein the stand propounded by the assessee was accepted in respect of call money. The assessee in respect of call money with banks has succeeded in the subsequent assessment years in appeals filed under the Act before the Tribunal and this factum is recorded in the order passed by the Commissioner of Income Tax (Appeals) as well as the Tribunal. In view of the aforesaid position, we do not find any reason to interfere with the order of the Tribunal affirming deletion of penalty. The appeal is accordingly dismissed.