Allowed

Commissioner of Income Tax v. State Bank of Bikaner and Jaipur

Rajasthan HC12 Nov 2014ITA/135/2004

Case brief

AI extract

What is this about?

The High Court of Rajasthan disposed of a bunch of Income Tax appeals and references concerning interest tax levied on a State Bank of Bikaner. The Court answered four substantial questions of law in favor of the assessee, holding that re-discount charges, export subsidies, overdue interest, and guarantee fees are not chargeable under the Interest Tax Act, 1974.

What did the court decide?

The bunch of income tax appeals and references were disposed of by answering the four questions of law in favour of the assessee-bank and against the revenue.

Commissioner of Income Tax Vs State Bank of Bikaner and Jaipur — Income Tax | Rajasthan HC (2014)

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IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR

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*******

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Judgment

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(1) DB Income Tax Appeal No.201/2005 Commissioner of Income Tax Jaipur-II, Jaipur Vs.

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State Bank of Bikaner & Jaipur

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(2) DB Income Tax Reference No.87/1983 State Bank of Bikaner & Jaipur Vs.

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Commissioner of Income Tax

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(3) DB Income Tax Reference No.58/1995 State Bank of Bikaner & Jaipur Vs.

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Commissioner of Income Tax

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(4) DB Income Tax Appeal No.67/2004 State Bank of Bikaner and Jaipur Vs.

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The Commissioner of Income Tax & anr.

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(5) DB Income Tax Appeal No.82/2004 State Bank of Bikaner and Jaipur Vs.

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The Commissioner of Income Tax & anr.

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(6)DB Income Tax Appeal No.83/2004 State Bank of Bikaner and Jaipur Vs.

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The Commissioner of Income Tax & anr.

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(7) DB Income Tax Appeal No.91/2004 Commissioner of Income Tax Jaipur-II, Jaipur Vs.

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State Bank of Bikaner & Jaipur

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(8) DB Income Tax Appeal No.93/2004 Commissioner of Income Tax Jaipur-II, Jaipur

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Vs.

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State Bank of Bikaner & Jaipur

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(9) DB Income Tax Appeal No.94/2004 Commissioner of Income Tax Jaipur-II, Jaipur

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Vs.

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State Bank of Bikaner & Jaipur

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(10) DB Income Tax Appeal No.96/2004 Commissioner of Income Tax Jaipur-II, Jaipur Vs.

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State Bank of Bikaner & Jaipur

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(11) DB Income Tax Appeal No.97/2004 Commissioner of Income Tax Jaipur-II, Jaipur Vs.

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State Bank of Bikaner & Jaipur

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(12) DB Income Tax Appeal No.100/2004 Commissioner of Income Tax Jaipur-II, Jaipur Vs.

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State Bank of Bikaner & Jaipur

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(13) DB Income Tax Appeal No.101/2004 Commissioner of Income Tax Jaipur-II, Jaipur Vs.

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State Bank of Bikaner & Jaipur

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(14) DB Income Tax Appeal No.105/2004 Commissioner of Income Tax Jaipur-II, Jaipur Vs.

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State Bank of Bikaner & Jaipur

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(15)DB Income Tax Appeal No.130/2004 State Bank of Bikaner and Jaipur Vs.

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The Commissioner of Income Tax & anr.

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(16) DB Income Tax Appeal No.135/2004 Commissioner of Income Tax Jaipur-II, Jaipur Vs.

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State Bank of Bikaner & Jaipur

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(17) DB Income Tax Appeal No.153/2004 Commissioner of Income Tax Jaipur-II, Jaipur Vs.

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State Bank of Bikaner & Jaipur

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(18) DB Income Tax Appeal No.155/2004 Commissioner of Income Tax Jaipur-II, Jaipur Vs.

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State Bank of Bikaner & Jaipur

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(19) DB Income Tax Appeal No.156/2004 Commissioner of Income Tax Jaipur-II, Jaipur Vs.

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State Bank of Bikaner & Jaipur

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(20) DB Income Tax Appeal No.157/2004 Commissioner of Income Tax Jaipur-II, Jaipur Vs.

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State Bank of Bikaner & Jaipur

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(21) DB Income Tax Appeal No.181/2005 Commissioner of Income Tax Jaipur-II, Jaipur Vs.

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State Bank of Bikaner & Jaipur

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(22) DB Income Tax Appeal No.230/2005 Commissioner of Income Tax Jaipur-II, Jaipur Vs.

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State Bank of Bikaner & Jaipur

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::: Judgment reserved on 18^th September, 2014 Judgment pronounced on ::: 12^th November, 2014

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PRESENT

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HON'BLE MR. JUSTICE AJAY RASTOGI. HON'BLE MR. JUSTICE J.K. RANKA.

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Mr. RB Mathur, Adv., ] for Mrs. Parinitoo Jain, Adv. ] Revenue

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Mr. SM Mehta, Sr. Adv. with ] Ms. Pallivi Mehta, Adv. ] Mr. PK Kasliwal, Adv. ] for Assessee Mr. CM Sharma, Adv. ]

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Reportable

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By the Court : (Per Hon'ble Ranka, J.)

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These Income Tax References and Income Tax

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Appeals relating to various assessment years commencing from 1975-76 to 1999-2000 between the same parties, are directed against order of the Income Tax Appellate Tribunal (for short, 'ITAT')under Interest Tax

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Act, 1974 (for short, 'IT Act, 1974').

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Some of the appeals/references are by the assessee while some of the appeals/references are by the revenue and since the facts, controversy and questions involved in all the cases being similar, with the consent of the parties, the bunch of cases are being decided by this common order.

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Brief facts, which can be noticed, are that 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 controversy in all these cases relates to Interest Tax Act, 1974. Following substantial questions of law have been referred to by the ITAT in the reference applications, later on following substantial questions of law have been admitted by this Court u/s 260A and emerge for consideration in the present bunch of references and appeals:-

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“1. Whether in the facts and circumstances of the case, the ITAT was justified in holding that amount paid by the assessee to the IDBI, RBI on rediscounting of bills are not part of interest income and as such not chargeable to interest tax?

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Whether in the facts and circumstances of the case, the ITAT was justified in law in holding that the amount of subsidy received by the assessee from RBI under the Export Credit (Interest Subsidy), 1968 is not liable to interest tax?

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Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that overdue interest amounting to Rs.49,54,371/- charged by the bank was chargeable amount under the Interest Tax Act?

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Whether in the facts and circumstances of the case and in law the ITAT was justified in law in holding that the guarantee fee/commission shown by the assessee itself under the head of interest is not liable to tax under the Interest Tax Act?”

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At the outset, it would be appropriate to quote definition of interest as provided under Sec. 2(7) of the Interest Tax Act, 1974, as the issues by and large hinges on what constitutes interest under the said Act, which reads ad-infra:-

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“2(7) 'interest' means interest on loans and advances made in India and includes-

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(a) commitment charges on unutilised portion of any credit sanctioned for being availed of in India ; and

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(b) discount on promissory notes and bills of exchange drawn or made in India, but does not include-

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(i) any amount chargeable to Income Tax under the Income Tax Act, under the head “ Interest on securities” ;

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(ii) discount on treasury bills ;

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(iii) interest on moneys lent for the creation of a capital asset in India where the agreement under which such moneys are lent provides for the repayment thereof during a period of not less than seven years;

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(iv) interest on any deferred credit (that is to say, credit on the terms that the payment is to be deferred) sanctioned by a scheduled bank in connection with the export of capital plant and machinery outside India;

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(v) interest on any loan in foreign currency sanctioned by any Corporation or bank referred to in Sub-clause (a) or Subclause (b) or Sub-clause (c) or Sub-clause (d) of Clause (9) for the import of capital plant and machinery from a country outside India.”

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We will briefly discuss on the aforesaid questions in seriatim.

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- (Question No.1): Re-discount paid to RBI/IDBI:

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The claim of the bank is that the bank discounts various bills of its constituents (borrowers) and the discount earned on such bills is credited to discount account. The contention of the bank is that some of these bills are passed on to the RBI/IDBI for re-discounting and on such passing of the bills, the bank has to pay discount to the RBI/IDBI thus the discount earned by the bank would be the discount minus re-discount charges paid to

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RBI/IDBI and thus amount paid is allowable as a deduction out of the total amount earned and only net is to be considered as chargeable under the Interest Tax Act.

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Learned counsel for the assessee relied upon following judgments in support of his submission:-

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(1) CIT Vs. State Bank of Indore (1987) 172 ITR 24 (MP);

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(2) CIT Vs. Canara Bank (1988) 175 ITR 601 (Kar.); (3) CIT Vs. Bank of Maharashtra (2003) 264 ITR 568 (Bom.);

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(4) CIT Vs. Canara Bank (2007) 293 ITR 115 (SC).

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6.1. Per contra, the claim of the revenue is that the said amount, which has been paid to the RBI/IDBI, is not required to be deducted as it is paid separately by the bank and there is no reason or co-relation with the discount earned on such bills.

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6.2 We have considered the arguments advanced

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by counsel for the parties and the material on records. 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/corelation with 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

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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 Hon'ble Apex Court had an occasion to consider this issue in the case of CIT Vs. Canara Bank (2007) 293 ITR 115 (SC) and after analyzing the material on record and after going through the entire scheme, observed as under:-

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“Under the Scheme, the primary responsibility for payment to IDBI is placed on the seller's bank which in the present case is the assessee-bank. Therefore, the rediscounting charges of IDBI collected by the assesseebank cannot be “chargeable interest” under section 2(7) of the 1974 Act since even before the said amount could reach the hands of the assessee-bank, it is impressed with the character of rediscounting charges payable to IDBI. The Scheme, viewed as a whole, makes it clear that the assessee-bank is only the medium for the disbursement of the development fund for the implementation of the Scheme for which the assessee-bank is allowed to retain 1.75 per cent., Which accrues to the assessee-bank and, therefore, it is not possible to bifurcate the transaction which has to be read in its entirety.”

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6.3. 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.

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- (Question No.2): Subsidy received from the RBI:

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The next question for consideration is with regards to the subsidy received by the assessee from the RBI on export credit loans. It was the claim of the assessee that as per the scheme of the RBI, the assesse 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. On perusal of aforesaid facts, it is clear that such subsidy is not received from the customers and is not relatable to what was lended & 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

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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.

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7.1 At the outset, ld. counsel for the assessee contended that the latest judgment of the Delhi High Court, rendered in the case of Punjab National Bank Vs. CIT : (2011) 332 ITR 337 against which even the SLP was rejected by the Hon'ble Apex Court vide its judgment reported in (2008) 307 ITR (Statues) 4 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.

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7.2. Ld. 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.

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(Question No.3): Overdue Interest on inland/foreign demand bills: -

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The next question, which emerges for consideration is the nature of “overdue interest” on inland/foreign demand bills. The contention of the assessee bank is that the “overdue interest” on inland/foreign demand bill does

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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 is 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.

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8.1. Learned counsel for the assessee contended

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that merely because the nomenclature “overdue” has been indicated by the assessee, does 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. It was further contended that the charges for delayed payments are recovered from person who is not a borrower of the bank, as after the due date such relationship ends. It was further contended that after the due date, if anything is recovered by the bank, the character of the receipt changes and does not fall within the ambit and definition of Interest under the Interest Tax Act. He further relied upon the judgments rendered in CIT Vs. State Bank of Travancore (1997) 228 ITR 40 (Kerala); CIT Vs. State Bank of Indore (1988) 172 ITR 24 (MP); CIT Vs. Corporation Bank (2007) 295 ITR

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193 (SC); CIT Vs. Canara Bank (1988) 175 ITR 601 (Kar.); CIT Vs. Cholamandalam Investment & Finance Co. Ltd. (2008) 296 ITR 601 (Mad.); CIT Vs. Vijaya Bank (2006) 285 ITR 97 (Kar.); CIT Vs. State Bank of Mysore (2009) 315 ITR 278 (Kar.).

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8.2. The contention of the revenue, on the contrary, is that the very nature of the term ''overdue interest'', which is also credited by the assessee under the head interest sufficiently shows that is is taxable u/s2(7) of the Act. The overdue interest is directly related to the advances made by the bank on the purchase of demand bill from its constituents and is certainly liable to be taxed as interest within the definition of Sec. 2(7) of the Interest Tax Act.

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8.3. Learned 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 admits that it is in the nature of “overdue interest”, then there is a direct nexus with the loan and advances made by the assessee bank. It is further contended that the loans/advances were extended by the bank on an agreed

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rate of interest and even after the due date, the character and the nature of the transaction remains the same and “overdue interest” is certainly liable to be taxed under the Interest Tax Act. It is further contended that the definition of interest u/S 2(7) is comprehensive to cover even the so called damages/liquidated penalty/compensation and it would certainly fall within the ambit and scope of Section 2 (7). Counsel in support of this contention relied upon the judgment rendered by Karnataka High Court in the case of State Bank of Mysore Vs. CIT, reported in (1988) 175 ITR 607 and Punjab and Haryana High Court in the case of CIT Vs. State Bank of Patiala, reported in (2006) 300 ITR 395. He further contended that apart from Kerala High Court and Madhya Pradesh High Court relied upon by the assessee all are distinguishable.

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8.4. We have considered the rival submissions and with assistance perused the material on record. We may observe that the Tribunal for the assessment years 197576 to 1996-97 had decided the issue of “overdue interest” against the assessee bank, however, after the judgment of the MP High Court was rendered in the case of CIT Vs. State Bank of Indore (supra); the Tribunal changed its own view thereafter from the assessment year 1997-98

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and onwards.

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8.5. 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.

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8.6. The principle of strict interpretation of taxing statutes was enunciated by Rowlatt J. in his classic statement in Cape Brandy Syndicate Vs. I.R.C. reported in (1921) 1 KB 64(KB) 71:

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“ In a taxing statute one has to look merely at what is clearly said. There is no room for intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One must only look fairly at the language used.”

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8.7. The definition of “interest” under the Interest

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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 (1957) AIR 657 (SC) the following fiscal principle :

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“ If the Revenue satisfies the court that

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the case falls strictly within the provisions of the law, the subject cannot be taxed. If on the other hand, the case is not covered within the four corners of the provisions of the taxing statute no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by considering what was the substance of the matter.”

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8.8. 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. 132 of the Negotiable Instrument Act, 1881 and in accordance with the terms of the agreement, that its constituents (borrowers), the bills were purchased by the assessee and on account of the delayed payment of bills, the assessee became entitled to liquidated damages by way of compensation from the borrower. The right to charge that amount by the assessee did not, therefore, arise on account of any delay in re-payment of any loan or advances made by the assessee. 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 interest proper and interest by way of damages but the provision of the Interest Tax Act can be said to be attracted only in case of interest received on loans and advances.

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However, the transaction ends on the due date occurs and the relationship of borrower lender ends.

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8.9. 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.

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8.10. 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

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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.

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8.11. 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: (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.

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8.12. 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.

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(Question No.4): Guarantee Fees Paid to Deposit Insurance and Credit Guarantee Corporation (DICGC):-

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The contention of the assessee is that the guarantee commission is an incidental service charge which the assessee bank collects from its constituents (borrowers) and passes the same to the Deposit Insurance and Credit Guarantee Corporation of India (DICGC) in totality and that the assessee bank pays the guarantee fee to the DICGC in advance and thereafter it recovers the amount from its constituents and thus it does not fall in the nature of interest. However, contention of the revenue on the contrary has been that whatever is recovered/charged by the assessee from the constituents (borrower) will squarely fall within the definition of interest though may be termed as guarantee commission or otherwise. The revenue also contended that paying any advance to the DICGC would certainly not make any difference as ultimately the assessee is recovering/charging certain amount and is also being credited by the assessee in its books of accounts as “interest” and according to the revenue, it is in the nature of interest.

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9.1. Learned Counsel for the assessee contended

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that by taking such insurance, each depositor of the bank is insured upto a certain amount and in case of cancellation/closure/liquidation of Bank minimum guaranteed amount is received by the bank. The bank in turn collects the insurance charges from its constituents, the amount received is thus merely an incidental and service charge and not in the nature of interest. He further contended that merely making entries in the books of accounts or crediting the said amount by way of interest cannot change the character of the receipt and every receipt cannot be in the nature of interest and in the present case, though the assessee might have credited the same as interest, but it is certainly not interest under the Interest Act and in support of his submission, he relied upon judgment of the Hon'ble Apex Court in the case of Sutlej Cotton Mills Ltd. Vs. CIT; reported in (1979) 116 ITR 1 and Godhara Electricity Company Ltd. Vs. CIT (1997) 225 ITR 746 wherein it was held that the way in which entries are made by an assessee in his books of accounts is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee by making entries which are not in conformity with the guiding principles of accountancy, may conceal profit or show loss and the entires made by him cannot,

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therefore, be regarded as conclusive, what is necessary to be considered is the true nature of the transaction and whether in case it has resulted in profit or loss to the assessee. Ld. counsel thus contended that the amount as collected was passed on to the DICGC and he further contended that even if it can be termed as interest, then the entire amount was passed on to the DICGC and that if taxed interest at the end of the day, nothing remains with the assessee.

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9.2. Per-contra, learned counsel for the revenue contended that the nature of the transaction itself speaks that it is in the nature of interest and was also shown as interest in the books of accounts and when it has been shown by way of interest, character remains the same as that of interest. He further contended that, had it been so, the assessee ought to have credited the said amount which has been charged by the assessee from the constituents (borrower) as incidental charges or service charges for onward payment to DICGC. He also contended that there is nothing on record to show that assessee paid in advance and collected later from constituents and no reason has been assigned, why one would pay in advance when no occasion arose for

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payment at all, by this, he wanted to bring home to the point that there is no correlation with amount collected and paid and retained. Thus contended that the issue is required to be decided in favour of revenue.

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9.4. We have considered the rival contentions and 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 as under:-

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“interest means interest payable in any manner in respect of any moneys borrowed or debt incurred including a deposit, claim or other similar right or obligation and includes any service fee or other charges in respect of money as charge or debt incurred or in respect of any credit facility which has not been utilized.”

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On conjoint reading of the definition of interest, which has been quoted herein above and under the Interest Tax Act in para 4 (supra), 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

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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 (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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9.5. The question of law is decided in favour of the assessee and against the revenue.

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