The Commissioner of Income Tax vs Indian Overseas Bank, Funds and Accounts Department

P.D. Dinakaran, J.—The above tax case appeals are directed against the common order of the Income Tax Appellate Tribunal in ITA. No.

1607/Mds/97 and ITA No. 1608/Mds/97, dated 16.7.2004.

The Revenue is the appellant. The assessment year s involved are 1992-1993 and 1993-94. The assessee filed its return declaring chargeable

interest at Rs. 1,62,05,76,863/- for the period 1.10.1991 to 31.3.1992. A notice was issued u/s 8(2) of the Interests Tax Act and on the basis of

the details filed, assessment was completed. The assessee claimed exemption on the interest received from credit institutions at Rs. 1,17,03,966/-

and interest on bills discounted at Rs. 5,76,79,379/-. The claim of the assessee was negatived, against which an appeal was filed by the assessee

before the Commissioner of Income Tax (Appeals), who partly allowed the appeal. Against this, Revenue approached the Tribunal.

The Tribunal, following the decisions reported in Commissioner of Income Tax Vs. Lakshmi Vilas Bank Ltd., and Commissioner of Income Tax

Vs. Bank of Madura Ltd., , declined to interfere with the conclusion arrived at by the Commissioner of Income Tax and thus dismissed the appeal.

Aggrieved by the said decision of the Tribunal, the Revenue has preferred the present appeal raising the following substantial questions of law:

Whether on the facts and in the circumstances of the case, the Income Tax Tribunal is right in law in holding that interest on bills rediscounted

will not form part of chargeable interest under the Interests Tax Act ?

Whether on the facts and in the circumstances of the case, the Income Tax Tribunal is right in law in holding that interest tax collected from the

borrowers would form part of the income of the assessee ?

Whether on the facts and in the circumstances of the case, the Income Tax Tribunal is right in law in holding that the interest on securities,

interest on debentures, interest on Government Electricity Bonds etc. cannot be taxed under the Interest Tax Act ?

With regard to the first question that whether the interest on bills rediscounted will not form part of chargeable interest under the Interests Tax

Act, the learned counsel for the assessee placed reliance on the decision reported in State Bank of Mysore Vs. Commissioner of Income Tax, , a

decision of Karnataka High Court, wherein it is held that,

... the sum of Rs. 36,40,206 representing rediscounting interest paid on bills did not accrue or arise to the assessee-bank by reason of diversion of

such discount through overriding title in favour of the Reserve Bank of India and the Industrial Development Bank of India and hence did not form

part of the chargeable interest under the provisions of the Interest-tax Act, 1974.

In view of the above proposition of law, we hold that the Tribunal was right in holding that interest on bills rediscounted would not form part of

chargeable interest under the Interest tax Act. Accordingly, the first question is answered in the affirmative, against the Revenue and in favour of the

assessee.

As far as the second question whether the interest tax collected from the borrowers would form part of the income of the assessee is concerned,

the same is squarely covered by the decision of this Court reported in Commissioner of Income Tax Vs. Bank of Madura Ltd., , wherein this

Court held thus,

... There is no prohibition for the bank to collect the tax payable by it from its borrowers under the various heads for various purposes. The bank

was charging interest at 12 per cent on the amount advanced by it to its borrowers. The amount of seven per cent collected from the borrowers is

for the purpose of paying tax under the Interest-tax Act. In fact, the collection of these amounts has no nexus with the amount advanced by the

assessee-bank to its borrowers. In reality, it is interest on interest. It is stated that there is an oral contract between the borrowers and the bank for

the payment of seven per cent on the borrowed amount. The amount collected at seven per cent by the bank was paid as tax under the Interest-

tax Act, 1974. The assessee-bank is also offering this seven per cent collection for Income Tax purposes and Income Tax was levied thereon. The

assessee-bank has to pay advance tax every three months. Therefore, the amount collected by the assessee-bank, though it reached its hands,

ultimately went into the coffers of the Government. The assessee-bank is not appropriating the said amount for its own benefit. Under the law there

is no prohibition for such collection. Thus, considering the facts arising in this case in the light of the judicial pronouncements cited supra, we hold

that the Tribunal was correct in holding that seven per cent amount collected by the assessee-bank would not fall under the definition ""interest"" as

stated in Section 2(7) of the Interest-tax Act....

Following the above said decision, we hold that the Appellate Tribunal was right in holding that interest tax collected from the borrowers would

form part of the income of the assessee. The second question is answered in the affirmative, against the Revenue and in favour of the assessee.

In so far as the third question of law as to the taxability of interest on securities, interest on debentures and interest on Government Electricity

Bonds etc. is concerned, this Court in Commissioner of Income Tax Vs. Lakshmi Vilas Bank Ltd., , considered the question whether the interest

on debentures is taxable and held as under:-

... The Tribunal pointed out that interest from debentures issued by companies will certainly be entitled to be excluded. In order to support the

conclusion arrived at by the Tribunal that co-operative societies registered under the Co-operative Societies Act are also corporate bodies,

reference was made to the speech made by the Finance Minister, dated July 31, 1974, in Parliament, which is extracted at page 76 of (1974) 95

ITR 1830 the speech made by the Finance Minister, it was pointed out that the Government propose to levy a tax on the gross amount of interest

received by scheduled banks on loans and advances made in India. The proposed tax will have both a monetary and a fiscal impact in that it will

serve the purpose both of raising the cost of borrowed funds and of supplementing Government revenues. The debentures and other securities

issued by local authorities, companies and statutory corporations will not be included in the tax base. Interest received on transactions between

scheduled banks will likewise be exempted from the proposed levy.

It is also relevant to refer to recent decision of the Bombay High Court in Commissioner of Income Tax Vs. United Western Bank Ltd.,

wherein it is held that the Interest-tax Act would not apply to interest received by the assessee-bank on securities/debentures held by the assessee

under the category ""permanent"".

Following the said decisions, we hold that the Tribunal was right in holding that the interest on securities, interest on debentures, interest on

Government electricity bods, etc. cannot be taxed under the Interest Tax Act. Accordingly, the third question is also answered in the affirmative,

against the Revenue and in favour of the assessee. The appeals stand dismissed. No costs.