Circular No. 159-Income Tax dated 13/12/1974

INTEREST-TAX ACT, 1974

Introduction

1. The Interest-tax Bill, 1974, as passed by Parliament,  received the assent of the President on 23-9-1974 and has been enacted as the Interest-tax Act, 1974 (45 of 1974). Section 27 of the Interest-tax Act, 1974 empowers the Board to make, subject to the control of the Central Government, rules for carrying out the purposes of the Act. The Board has, in exercise of this power, made the Interest-tax Rules, 1974 which have been published in the Official Gazette on 30-12-1974. This circular explains the main provisions contained in the Act and the Rules.

INTEREST-TAX ACT, 1974

2. The Interest-tax Act imposes a special tax on the gross amount of interest received by scheduled banks on loans and advances made in India. The banks are expected to adjust their functioning to the tax and reimburse themselves to the extent necessary by making a proper adjustment in interest rates charged from borrowers. The tax is thus expected to have both monetary and fiscal impact inasmuch as it will serve the purpose of raising the cost of borrowed funds and supplementing Government revenues.

INTEREST-TAX ACT, 1974

Administration of the Interest-tax Act

3. The Interest-tax Act will be administered by the Income-tax Department and, for this purpose, the various income-tax authorities will have the like powers and perform the like functions as they have to perform under the Income-tax Act. Their jurisdiction under the Interest-tax Act will also be same as for the purposes of income-tax.

[Section 3 of the Act]

 INTEREST-TAX ACT, 1974

Scope of the levy

4. Interest-tax will be payable by every “scheduled bank” in respect of its “chargeable interest” of the previous year relevant to every assessment year commencing on or after 1-4-1975.

The expression “scheduled bank” has been defined to mean the State Bank of India and its subsidiaries, the nationalised banks, as also other banks which are listed in the Second Schedule to the Reserve Bank of India Act, 1934. Thus, the levy will, at present, extend to the State Bank of India and its subsidiaries, 14 nationalised banks, 40 non-nationalised commercial banks, 13 foreign banks operating in India and 14 State co-operative banks. The list of the scheduled banks is annexed hereto.

The expression “chargeable interest” has been defined to mean the total amount of “interest” (other than interest on loans and advances made to scheduled banks) accruing or arising to the bank in the relevant previous year, as computed in the manner laid down in section 6. Interest on loans and advances made to other scheduled banks has been excluded from the tax base on the consideration that such loans and advances represent temporary accommodation granted by one bank to another and the interest received by the borrowing bank from its constituents will be chargeable to tax in its own hands. Section 6 provides that chargeable interest will not include any interest accruing or arising to the bank before 1-8-1974 and will be computed after allowing a deduction in respect of the amount of interest which is established to have become a bad debt during the relevant previous year. The deduction in respect of bad debts will be allowed only if the following conditions are satisfied, namely :

 (a)  the interest has been taken into account in computing the chargeable interest of the assessee of any earlier previous year; and

 (b)  the amount is written off as irrecoverable in the accounts of the assessee for the relevant previous year.

It will be manifest that no deduction on account of bad debts will be allowable in respect of interest accruing or arising to the bank in any previous year preceding the previous year relevant to the assessment year 1975-76, as such interest has not been taken into account in computing the chargeable interest under the Interest-tax Act. It should be noted that no deduction other than the deduction on account of bad debts is allowable in computing the chargeable interest.

The term “interest” will include (a) commitment charges on the unutilised portion of any credit sanctioned for being availed of in India, and (b) discounts on promissory notes and bills of exchange drawn or made in India. Discounts on treasury bills are, however, exempted from the levy. It may be noted that interest on loans and advances made outside India, commitment charges in respect of such loans and advances and discounts on promissory notes drawn or made outside India are not chargeable to interest-tax. Interest on Government securities and on debentures and other securities issued by local authorities, companies or statutory corporations is also not regarded as “interest” for the purposes of the Interest-tax Act.

[Sections 2 (Part), 4, 5 and 6 of the Act]

INTEREST-TAX ACT, 1974

Return of chargeable interest

5. Section 7 contains provisions for the furnishing of returns of chargeable interest which are broadly on the lines of the provisions in section 5 of the Companies (Profits) Surtax Act, 1964. The principal officer of a scheduled bank, or where in the case of a non-resident scheduled bank, any person has been treated as its agent under section 163 of the Income-tax Act, such person will be required to furnish voluntarily a return of chargeable interest of the bank of the relevant previous year before 30th June of the assessment year. The Income-tax Officer will also have the power to require the principal officer or the agent, by notice in writing, to furnish a return of the chargeable interest of the bank within 30 days of the service of the notice. The time allowed for furnishing the return can be extended by the Income-tax Officer in appropriate cases. It will be open to the assessee to furnish at any time before the assessment is made, a return or a revised return even though the time allowed for furnishing the return may have expired.

The return of chargeable interest will be in Form No. 1 prescribed under the Interest-tax Rules, 1974.

[Section 7 of the Act]

INTEREST-TAX ACT, 1974

Assessment

6. Section 8 lays down the procedure to be followed in making a regular assessment. The provisions of this section are broadly on the lines of the provisions in section 6 of the Companies (Profits) Surtax Act, 1964.

The Income-tax Officer has been empowered to serve a notice on any person who has furnished a return of chargeable interest or upon whom a notice has been served under section 7(2) (irrespective of whether a return has been furnished or not) requiring him  to produce or cause to be produced such accounts, documents or evidence as the Income-tax Officer may require for the purposes of the Interest-tax Act. The notice will specify a date on which the accounts, documents or evidence should be produced. It will be open to the Income-tax Officer to serve further notices from time to time requiring the production of accounts, documents, etc. After considering the evidence produced by the assessee and the relevant material that the Income-tax Officer may have gathered, the Income-tax Officer will pass an order in writing, determining the chargeable interest and the amount of interest-tax payable by the assessee.

[Section 8 of the Act]

INTEREST-TAX ACT, 1974

Self-assessment

7. Section 9 provides for the payment of interest-tax by the assessee on the basis of his own assessment. Where the assessee has furnished a return of chargeable interest and the interest-tax payable on the basis of the return exceeds any interest-tax already paid for the relevant assessment year, he will be required to pay the excess within 30 days of furnishing the return. It should be noted that, unlike the corresponding provision in section 140A of the Income-tax Act, interest-tax will be payable on the basis of self-assessment even in cases where the tax so payable does not exceed Rs. 500.

In case of default in payment of interest-tax or any part thereof on the basis of self-assessment, the assessee would be liable to pay such penalty as the Income-tax Officer may direct. No penalty will, however, be imposable in a case where a regular assessment has been made by the Income-tax Officer within 30 days of furnishing the return by the assessee. In case of continuing default, it would be open to the Income-tax Officer to levy further penalty, so, however, that the total amount of penalty would not exceed 50 per cent of the  amount due. Before levying the penalty, the Income-tax Officer will be required to give a reasonable opportunity to the assessee of being heard.

The assessee will be given credit for the interest-tax paid on self-assessment against his liability under the regular assessment.

[Section 9 of the Act]

INTEREST-TAX ACT, 1974

Reassessment

8. Section 10 contains provisions for assessment or reassessment of chargeable interest in cases where such interest has escaped assessment. These provisions are broadly on the lines of the provisions in section 8 of the Companies (Profits) Surtax Act, 1964.

It should be noted that, as in the case of surtax, there is no limitation for issuing a notice under section 10 in cases where the assessee had failed to furnish a return of chargeable interest under section 7 or where there was concealment of material facts on his part. In cases where there is no omission or failure on the part of the assessee,  a notice under section 10 can be issued within four years of the expiry of the relevant assessment year.

[Section 10 of the Act]

INTEREST-TAX ACT, 1974

Advance payment of interest-tax

9. Section 11 provides for payment of interest-tax in advance during the financial year immediately preceding the assessment year. Under this provision, an assessee will be required to pay advance tax in two instalments which will be respectively due on 15th September and 15th March of the financial year. For this purpose, he will be required to furnish an estimate of the instalment of interest-tax payable by him in advance in respect of the chargeable interest accruing or arising during the first half or, as the case may be, the second half of the previous year. The estimate will  be filed in Form No. 2 prescribed under the Interest-tax Rules, 1974 and the assessee will be required to pay the amount of interest-tax on the basis of such estimate on or before the relevant date.

In this connection, it may be mentioned that the scheduled commercial banks close their accounts half-yearly on 30th June and 31st December every year. In the case of such banks, only one instalment will fall due on 15-3-1975, during the current financial year and this will cover interest accruing or arising to such banks during the period of five months from August 1974 to December 1974. In the case of scheduled co-operative banks, the accounts are closed on 30th June every year. Since interest accruing before 1-8-1974 is excluded from the tax base, no tax will be payable by co-operative banks for the assessment year 1975-76. The advance payment for the assessment year 1976-77 will be made by such banks in two instalments falling due on 15-9-1975 and 15-3-1976.

In case of default in payment of any instalment of interest-tax payable in advance, the assessee shall be deemed to be an assessee in default in respect of such instalment and the arrears would be recoverable in accordance with the procedure laid down under the Income-tax Act for the recovery of income-tax.

[Section 11 of the Act]

 INTEREST-TAX ACT, 1974

Penalties for failure to furnish returns, comply with notices, concealment of interest, etc.

10. Section 12 provides for imposition of penalties for delay or default in furnishing returns of chargeable interest, non-compliance with notices under section 8(1) and for concealment of chargeable interest.

In a case where the assessee, without reasonable cause, delays or defaults in furnishing the return of chargeable interest under section 7(1) or section 7(2) or section 10 or where the return is not furnished in the required manner, the quantum of penalty imposable would be equal to 2 per cent of the “assessed tax” for every month during which the default continued, subject to a maximum of 50 per cent of the assessed tax. For this purpose, “assessed tax” would mean interest-tax chargeable under the provisions of the Interest-tax Act as reduced by the interest-tax paid in advance under section 11.

Where the assessee fails, without reasonable cause, to comply with a notice under section 8(1), the minimum penalty imposable will be 10 per cent and the maximum 50 per cent of the amount of interest-tax which would have been avoided if the return had been accepted as correct.

In a case where the assessee has concealed the particulars of his chargeable interest or furnished inaccurate particulars of such interest, the minimum penalty imposable will be equal to the amount of interest-tax which would have been avoided if the return had been accepted as correct and the maximum penalty will  be equal to twice the said amount. Before imposing the penalty for concealment of particulars of chargeable interest, however, the Income-tax Officer will obtain the prior approval of the Inspecting Assistant Commissioner. Before levying penalty under section 12, the Income-tax Officer will have to hear the assessee or give him a reasonable opportunity of being heard.

[Sections 12 and 14 (Part) of the Act]

INTEREST-TAX ACT, 1974

Penalties for false estimate of, or failure to pay, interest-tax in advance

11. Section 13 provides for imposition of penalties for defaults relating to payment of interest-tax in advance.

In a case where the assessee furnishes under section 11 an estimate of interest-tax payable in advance by him which he knew or had reason to believe to be untrue, the minimum penalty imposable will be equal to 10 per cent of the amount by which the interest-tax paid in advance during the financial year immediately preceding the assessment year falls short of 85 per cent of the interest-tax chargeable under the provisions of the Interest-tax Act and the maximum penalty will be equal to one and a half time of such shortfall.

In case of default in furnishing the estimate of interest-tax, the minimum penalty will be equal to 10 per cent of 85 per cent of the interest-tax chargeable under the provisions of the Interest-tax Act and the maximum penalty will be equal to one and a half time of 85 per cent of the interest-tax so chargeable.

Before imposing the penalty under section 13, the Income-tax Officer will have to hear the assessee or give him a reasonable opportunity of being heard.

[Sections 13 and 14 (Part) of the Act]

INTEREST-TAX ACT, 1974

Appeals, revisions, rectifications and reference applications

12. The provisions relating to appeals, rectifications, revisions and reference applications in respect of interest-tax are broadly similar to the corresponding provisions in the Companies (Profits) Surtax Act, 1964.

The Interest-tax Rules, 1974 have prescribed the following separate forms for presentation of appeals, etc. :

 (a)  Form No. 3 for appeal to the Appellate Assistant Commissioner of Income-tax under section 15.

 (b)  Form No. 4 for appeal to the Appellate Tribunal against the order of the Appellate Assistant Commissioner or Commissioner of Income-tax.

  (c)  Form No. 5 for filing a memorandum of cross-objections to the Appellate Tribunal.

[Sections 15, 16, 17, 19, 20 and 21 (Part) of the Act]

INTEREST-TAX ACT, 1974

Interest-tax to be deductible in computing taxable income under the Income-tax Act

13. The interest-tax payable by a scheduled bank for any assessment year will be deductible in computing the income of the bank chargeable under that Act under the head “Profits and gains of business or profession” for that assessment year.

[Section 18 of the Act]

INTEREST-TAX ACT, 1974

Recovery of interest-tax, penalty, etc.

14. The interest-tax or penalty levied under the Interest-tax Act will be recovered in the same manner as arrears of income-tax. For this purpose, several of the provisions relating to collection and recovery of income-tax have been referentially applied to the proceedings under the Act.

Where any tax, penalty or fine or any other sum is payable in consequence of any order passed under the Interest-tax Act, the Income-tax Officer will be required to serve a notice on the assessee in Form No. 6 prescribed under the Interest-tax Rules, 1974.

The provisions of sections 237 to 242, 244 and 245 relating to refunds under the Income-tax Act have also been applied to the proceedings under the Act.

An application for refund under the Act will, however, be filed in Form No. 7 prescribed under the Interest-tax Rules, 1974.

[Section 21 (Part) of the Act]

 INTEREST-TAX ACT, 1974

Income-tax papers to be available for the purposes of the Act

15. Any information contained in the income-tax records of the assessee will be available for the purposes of the Act. Likewise,  the information contained in the interest-tax records will be available for the purposes of the Income-tax Act.

[Section 22 of the Act]

INTEREST-TAX ACT, 1974

Prosecution and punishment for offences

16. Any person who fails, without reasonable cause, to furnish a return of chargeable interest under section 7(2) in due time or to produce any accounts or documents required under section 8, will be punishable with fine which may extend to Rs. 500 and with a further fine which may extend to Rs. 10 for every day during which the default continues.

Any person who makes a false statement in the return of chargeable interest, will be punishable with simple imprisonment which may extend to six months or with fine which may extend to Rs. 1,000 or with both. The abetment of this offence will also attract similar punishment.

The prosecution  for any offence under the Act or for any offence under the Indian Penal Code relating to any matter connected with or arising out of the Act will lie only at the instance of the Commissioner who will also have the power to compound any offence punishable under the Act.

The provisions for prosecution and punishment for offences are on the lines of the corresponding provisions in the Companies (Profits) Surtax Act, 1964.

[Sections 23, 24,  25 and 26 of the Act]

 INTEREST-TAX ACT, 1974

Power to make rules and remove difficulties

17. The Central Government have been empowered to make an order for removal of any difficulty that may arise in the operation of the Act provided the order is not inconsistent with the provisions thereof. This power will be exercisable during the period of two years from the coming into force of the Interest-tax Act, i.e., before 23-9-1976.

The Central Board of Direct Taxes has been empowered to make rules for carrying out the purposes of the Act. The power to make rules will, on the first occasion of the exercise thereof, be available for making rules with retrospective effect also, so, however, that no retrospective effect will be given from the date earlier than the coming into force of the Act.

[Sections 27 and 29 of the Act]

INTEREST-TAX ACT, 1974

Power to exempt

18. The Central Government has been empowered to exempt, on the recommendation of the Reserve Bank of India, any scheduled bank or any class of scheduled banks from the operation of the Act where it is satisfied that it would be in the public interest to do so.

[Section 28 of the Act]

 INTEREST-TAX ACT, 1974

Consequential amendments in other enactments

19. With a view to enabling the Board to administer the Act, the Central Board of Revenue Act, 1963 has been amended so as to include interest-tax in the list of direct taxes.

The Economic Offences (Inapplicability of Limitation) Act, 1974 has been amended so as to make provision as to limitation contained in Chapter XXXVI in the new Code of Criminal Procedure inapplicable to offences under the Act.

[Section 30 of the Act]

ANNEXURE

LIST OF SCHEDULED BANKS

1. State Bank of India

    Subsidiaries of State Bank of India (7)

2. State Bank of Bikaner & Jaipur

3. State Bank of Hyderabad

4. State Bank of Indor

5. State Bank of Mysore

6. State Bank of Patiala

7. State Bank of Saurashtra

8. State Bank of Travancore

Nationalised Banks (14)

9. Allahabad Bank

10. Bank of Baroda

11. Bank of India

12. Bank of Maharashtra

13. Canara Bank

14. Central Bank of India

15. Dena Bank

16. Indian Bank

17. Indian Overseas Bank

18. Punjab National Bank

19. Syndicate Bank

20. Union Bank of India

21. United Bank of India

22. United Commercial Bank

Other Indian Schedule Commercial Banks (40)

23. Andhra Bank Ltd.

24. Bank of Karad Ltd.

25. Bank of Madura Ltd.

26. Bank of Rajasthan Ltd.

27. Bareilly Corporation (Bank) Ltd.

28. Belguam Bank Ltd.

29. Benaras State Bank Ltd.

30. Bharat Overseas Bank Ltd.

31. Catholic Syrian Bank Ltd.

32. Corporation Bank Ltd.

33. Federal Bank Ltd.

34. Hindusthan Commercial Bank Ltd.

35. Hindusthan Mercantile Bank Ltd.

36. Jammu & Kashmir Bank Ltd.

37. Karanataka Bank Ltd.

38. Karur Vysya Bank Ltd.

39. Krishnaram Baldeo Bank Ltd.

40. Kumbakoam City Union Bank Ltd.

41. Lakshmi Commercial Bank Ltd.

42. Lakshmi Vilas Bank Ltd.

43. Lord Krishna Bank Ltd.

44. Miraj State Bank Ltd.

45. Narang Bank of India Ltd.

46. Nedungadi Bank Ltd.

47. New Bank of India Ltd.

48. Oriental Bank of Commerce Ltd.

49. Punjab & Sind Bank Ltd.

50.Punjab Co-operative Bank Ltd.

51. Purbanchal Bank Ltd.

52. Ratnakar Bank Ltd.

53. Sangli Bank Ltd.

54. South India Bank Ltd.

55. South Indian Bank Ltd.

56. Tamil Nadu Merchantile Bank Ltd.

57. Tanjore Permanent Bank Ltd.

58. Traders’ Bank Ltd.

59. United Industrial Bank Ltd.

60. United Western Bank Ltd.

61. Vijya Bank Ltd.

62. Vysya Bank Ltd.

Foreign Banks (13)

63. Algomene Bank Dederland N.V.

64. American Corporation

65. Bank of America National Trust & Saving Association

66. Bank of Tokyo Ltd.

67. Banque National de Paris

68. British Bank of the Middle East

69. Charted Bank

70. First National City Bank

71. Habib Bank Ltd.

72. Merchantile Bank Ltd.

73. Mitsui Bank Ltd.

74. National and Gridlays Bank Ltd.

75. National Bank of Pakistan

State Co-operative Bans(14)

1. Andhra Pradesh Sate Co-operative Bank

2. Bihar State Co-operative Bank

3. Gujrat State Co-operative Bank

4. Haryana State Co-operative Bank

5. Kerala State Co-operative Bank

6. Madhya Pradesh State Co-operative Bank

7. Madras State Co-operative Bank

8. Maharashtra State Co-operative Bank (Incorporating the Vidarbha Co-operative Bank)

9. Mysore State Co-operative Apex Bank

10. Orissa State Co-operative Bank

11. Punjab State Co-operative Bank

12. Rajasthan State Co-operative Bank

13. Uttar Pradesh Co-operative Bank

14. West Bengal Provincial Co-operative Bank