Case Law Details
Brief of the Case
Supreme Court held In the case of State Bank of Patiala vs. CIT that it is well settled that a subject can be brought to tax only by a clear statutory provision in that behalf. Interest is chargeable to tax under the Interest Tax Act, 1974 only if it arises directly from a loan or advance in India. Also the Interest Tax Act, unlike the Income Tax Act, has focused only on a very narrow taxable event which does not include interest payable on default in payment of amounts due under a discounted bill of exchange.
Facts of the Case
The bank makes purchases of bills of exchange from its customers and charges commission thereon for services rendered by it. The discounted bills so purchased are then presented to the parties concerned for realization. If on presentation the bill is realized within time, no charges are levied by the bank. In case the bills are not realized in time but the other party pays the value of the bill beyond the stipulated time, a certain amount in the form of interest is charged by the bank on a fixed percentage basis for every day of default. This amount is credited by the bank in its interest account. Under Section 4 of Interest Tax Act, there shall be charged on every scheduled bank for every assessment year a tax in respect of chargeable interest of the previous year at the rate of 7%.
On these broad facts there is a sharp cleavage of opinion between the High Courts. The Madhya Pradesh High Court, Kerala High Court, Andhra Pradesh High Court, Madras High Court and Rajasthan High Court have all decided that such amounts are not chargeable to tax as “chargeable interest” under the Interest Tax Act. On the other hand, the Karnataka High Court and the Punjab and Haryana High Court have differed from this view and have stated that such amount would be so chargeable.
Contention of the Appellant
The ld counsel of the assessee argued that a loan of money may result in a debt but every debt does not involve a loan. He further argued that the transaction of drawing, accepting, discounting or re-discounting of bills of exchange can be bifurcated into three separate categories, and that the drawer of a bill may discount the bill of exchange with the bank, which would not result into a relationship of debtor and creditor with the bank
Held by High Courts
The Karnataka High Court in State Bank of Mysore v. Commissioner of I.T., Karnataka-I, Bangalore, (1989) 175 ITR 607 has held that Discount on bill is a form of advance or loan granted to its customer by a Bank and if that be the true position as indicated by Paget any amount collected by the Bank for delayed payment of that amount cannot be anything but interest, whatever may be the nomenclature, and is chargeable interest for the purpose of Interest Tax Act. The Punjab and Haryana High Court in CIT v. State Bank of Patiala, (2008) 300 ITR 395 (P&H) has merely reiterated the aforesaid view.
On the other hand, the Madhya Pradesh High Court in Commissioner of Income-Tax v. State Bank of Indore, (1988) 172 ITR 24 has held that the provisions of the Interest-tax Act are attracted only in the case of interest on loans and advances. The amount charged by the assessee for delayed payment of bills cannot be held to be “interest on loans and advances” and exigible to tax under the Interest-tax Act. The Kerala High Court in Commissioner of Income Tax vs. State Bank of Travancore, [1997] 228 ITR 40 (Ker) has held 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 the amount alone would not satisfy the requirement of justification. Likewise, the Andhra Pradesh High Court in Commissioner of Income Tax v. State Bank of Hyderabad, [2014] 367 ITR 128 (AP) has also dissented from the Karnataka High Court’s view. Also The Madras High Court in Commissioner of Income Tax v. Cholamandalam Investment and Finance Co. Ltd., [2008] 296 ITR 601 (Mad ) has simply followed the Kerala High Court’s view, and the Rajasthan High Court in a judgment dated 12.11.2014, Civil Appeal No.4988 of 2015.
Held by Supreme Court
As per Section 2(7), Interest Tax Act, 1974, it is clear that the interest on which tax is payable under the Interest Tax Act is primarily on loans and advances made in India. By a deeming fiction discount on bills of exchange made in India is also included. It is clear, therefore, that discount on bills of exchange would obviously not come within the expression loans and advances made in India, and consequently any amount that becomes payable by way of compensation after a bill is discounted by the Bank would not be an amount which would be on loans and advances made in India.
The Karnataka High Court in State Bank of Mysore v. Commissioner of I.T., Karnataka-I, Bangalore, (1989) 175 ITR 607) in which it held that Discounting of Bills is a form of advance or loan, and hence compensation paid on delayed payment of money due thereon is interest on loans and advances, is not valid for the simple reason that Section 2(7) itself makes a distinction between loans and advances made in India and discount on bills of exchange drawn or made in India. It is obvious that if discounted bills of exchange were also to be treated as loans and advances made in India there would be no need to extend the definition of “interest” to include discount on bills of exchange. Indeed, this matter is no longer res integra. In CIT v. Sahara India Savings & Investment Corpn. Ltd., (2009) 17 SCC 43, this Court while dealing with the definition contained in Section 2(7) of the Interest Tax Act, held that In normal accounting sense, “loans and advances”, as a concept, is different from commitment charges and discounts and keeping in mind the difference between the three, the legislature, in its wisdom, has specifically included in the definition under Section 2(7) commitment charges as well as discounts.
Loans and advances have been held to be different from “discounts” and the legislature has kept in mind the difference between the two. It is clear therefore that the right to charge for overdue interest by the assessee banks did not arise on account of any delay in repayment of any loan or advance made by the said banks. That right arose on account of default in the payment of amounts due under a discounted bill of exchange. It is well settled that a subject can be brought to tax only by a clear statutory provision in that behalf. Interest is chargeable to tax under the Interest Tax Act only if it arises directly from a loan or advance. Also the Interest Tax Act, unlike the Income Tax Act, has focused only on a very narrow taxable event which does not include within its ken interest payable on default in payment of amounts due under a discounted bill of exchange.
We are agree with the Rajasthan High Court in a judgment dated 12.11.2014, Civil Appeal No.4988 of 2015 in which it was held 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 and mere crediting the said amount as interest will certainly not entitle the revenue to treat the same as interest.
Accordingly all appeals allowed.
