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Sunday, December 6, 2015

whether guarantee fees paid to the Deposit Insurance and Credit Guarantee Corporation could be included in the definition of interest in Section 2(7) of the Interest Tax Act, 1974, it will be clear that such definition does not include any service fee or other charges in respect of monies borrowed or debt incurred, again unlike the definition of ‘interest’ under the Income Tax Act. We find that the Rajasthan High Court in the impugned judgment in Civil Appeal No.4988 of 2015 is correct when it observed:- “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 22 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.” 20. In the circumstances, we dismiss the appeals of revenue and allow the appeals of the assessees and set aside the judgments in favour of revenue.

                                 REPORTABLE

                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                     CIVIL APPEAL NOS.5212-5220 OF 2007


M/S. STATE BANK OF PATIALA              …APPELLANT
THROUGH GENERAL MANAGER

                             VERSUS

COMMISSIONER OF INCOME TAX,
PATIALA                                      …RESPONDENT

                                    WITH

                        CIVIL APPEAL NO.3185 OF 2015
                        CIVIL APPEAL NO.3383 OF 2015
                        CIVIL APPEAL NO.3764 OF 2015
                        CIVIL APPEAL NO.3766 OF 2015
                        CIVIL APPEAL NO.13465 OF 2015
                [ARISING OUT OF SLP (CIVIL) NO.13359 OF 2015]
                        CIVIL APPEAL NO.3380 OF 2015
                        CIVIL APPEAL NO.3763 OF 2015
                        CIVIL APPEAL NO.13464 OF 2015
                [ARISING OUT OF SLP (CIVIL) NO.13357 OF 2015]
                        CIVIL APPEAL NO.4008 OF 2015
                        CIVIL APPEAL NO.4322 OF 2015
                        CIVIL APPEAL NO.4987 OF 2015
                        CIVIL APPEAL NO.4988 OF 2015
                        CIVIL APPEAL NO.4990 OF 2015
                        CIVIL APPEAL NO.4991 OF 2015
                        CIVIL APPEAL NO.4992 OF 2015
                        CIVIL APPEAL NO.4993 OF 2015
                        CIVIL APPEAL NO.4994 OF 2015
                        CIVIL APPEAL NO.4995 OF 2015
                        CIVIL APPEAL NO.4996 OF 2015
                        CIVIL APPEAL NO.4997 OF 2015
                        CIVIL APPEAL NO.4986 OF 2015
                        CIVIL APPEAL NO.5328 OF 2015
                        CIVIL APPEAL NO.3381 OF 2015
                        CIVIL APPEAL NO.3382 OF 2015


                           J  U  D  G  M  E  N  T



R.F. Nariman, J.



1.    Leave granted in special leave petition (civil)  nos.  13359  of  2015
and 13357 of 2015.

2.    There are 25 appeals that have been  posted  for  hearing  before  us.
They are concerned primarily with  interest  that  is  received  by  various
banks after bills of exchange have been  discounted  by  them  and  a  party
defaults and hence has to pay compensation by way of interest as payment  is
made after the  date  stipulated  in  the  bill  of  exchange.  The  precise
question that arises before us is whether such payment  of  compensation  to
the said banks is “interest” liable to  tax  under  the  Interest  Tax  Act,
1974.

3.    The facts in all the cases are similar.  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.

4.    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.



5.    The entire case hinges on the construction  of  Section  2(7)  of  the
Interest Tax Act, 1974 which defines “interest” as follows:-

“Section 2(7), Interest Tax Act, 1974

2. In this Act, unless the context otherwise requires,—

(7) "interest" means interest on  loans  and  advances  made  in  India  and
includes—
(a)    commitment charges on unutilised portion  of  any  credit  sanctioned
for being availed of in India; and
(b)    discount on promissory notes and bills of exchange drawn or  made  in
India,
but does not include—
(i)        interest referred to in sub-section (1B) of  section  42  of  the
Reserve Bank of India Act, 1934 (2 of 1934);
(ii)       discount on treasury bills;”


6.    Under Section 4 of the said 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%.

7.    The first  important  thing  to  notice  is  that  the  definition  of
interest contained in the Interest Tax Act, 1974 is a  narrow  one,  and  is
exhaustive as it is a ‘means and includes’ definition.  In P. Kasilingam  v.
P.S.G. College of Technology, 1995  Supp  (2)  SCC  348,  this  Court,  when
dealing with The Tamil Nadu Private Colleges (Regulation) Act, 1976,  stated
as follows:-

“A particular expression is often defined by the Legislature  by  using  the
word ‘means’  or  the  word  ‘includes’.  Sometimes  the  words  ‘means  and
includes’ are used. The use of the word ‘means’ indicates  that  “definition
is a hard-and-fast definition, and no other meaning can be assigned  to  the
expression than is put down in definition”. (See : Gough v. Gough [(1891)  2
QB 665 : 60 LJ QB 726] ; Punjab  Land  Development  and  Reclamation  Corpn.
Ltd. v. Presiding Officer, Labour Court [(1990) 3 SCC 682, 717  :  1991  SCC
(L&S) 71] .) The word ‘includes’ when used,  enlarges  the  meaning  of  the
expression defined so as to comprehend not only such things as they  signify
according to their natural import but also those  things  which  the  clause
declares that they shall include. The words “means  and  includes”,  on  the
other hand, indicate “an exhaustive explanation of the  meaning  which,  for
the purposes of the Act, must invariably  be  attached  to  these  words  or
expressions”. (See : Dilworth v. Commissioner of Stamps [1899  AC  99,  105-
106  :  (1895-9)  All  ER  Rep  Ext  1576]  (Lord  Watson); Mahalakshmi  Oil
Mills v. State of A.P. [(1989) 1 SCC 164, 169 :  1989  SCC  (Tax)  56]”  [at
para 19]



8.    The precise question that arises before  us  is  whether  compensation
that can be traced to Section 32 of the  Negotiable  Instruments  Act,  1881
can be regarded as interest  on  loans  and  advances.  Section  32  of  the
Negotiable Instruments Act states as follows:-

“Section 32. Liability of maker of note and acceptor of bill.

In the absence of a contract to the contrary,  the  maker  of  a  promissory
note and the acceptor before maturity of a bill of  exchange  are  bound  to
pay the amount thereof at maturity according to the apparent  tenor  of  the
note or acceptance respectively, and the acceptor of a bill of  exchange  at
or after maturity is bound to pay  the  amount  thereof  to  the  holder  on
demand.

In default of such payment as aforesaid, such maker or acceptor is bound  to
compensate any party to the note or bill for any loss  or  damage  sustained
by him and caused by such default.”



9.    It will be  seen  that  when  default  of  payment  takes  place,  the
acceptor of the bill of exchange is bound to compensate  any  party  to  the
bill for any loss or damage sustained by him and  caused  by  such  default.
In most cases such loss or damage  is  a  liquidated  amount  which  can  be
calculated from the rate mentioned on the face of the bill of exchange.

10.   The first thing that will be noticed is 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”.

11.   Shri A.K. Sanghi, learned senior advocate appearing on behalf  of  the
revenue  basically  placed  for  our  consideration  the  reasoning  of  the
Karnataka High Court judgment and adopted that reasoning  as  his  argument.
On the other hand, Shri Sanjay Jhanwar, learned counsel for  the  assessees,
placed before us the reasoning of the High Courts in his favour and  adopted
the same as his argument.  He also 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. It thus becomes imperative to first find out what  in  fact  the  High
Courts have held on this vexed question.

12.   The Karnataka High Court in State Bank of Mysore  v.  Commissioner  of
I.T., Karnataka-I, Bangalore, (1989) 175 ITR 607, has reasoned thus:

“Sri Sarangan, learned counsel for assessee relying on  a  decision  of  the
Madhya Pradesh High Court in C.I.T. v.State  Bank  of  Indore (69  CTR  (MP)
147) contended that though this sum of money may be interest  in  its  wider
sense including both interest proper and interest by way of  damages,  still
the provisions of Income Tax  Act  are  not  attracted  since  what  can  be
brought within the purview  of  the  Act  is  only  interest  on  loans  and
advances. The amount charged by the assessee on  delayed  payment  of  bills
cannot be held to interest on loans and advances and it was not exigible  to
tax under the Interest  Tax  Act.  He  also  relied  upon  Sec.  32  of  the
Negotiable  Instruments  Act  and  contended   that   the   said   provision
contemplates only compensation and not the interest at all.  When  the  Bank
discounts a bill what happens is the drawee gets a credit from the  Bank  to
the extent of the amount  covered  by  the  Bill.  This  position  has  been
explained in LAW OF BANKING By Paget, 9th Edition at page 415 thus:

“The discount of a bill is the purchase of it with,  normally,  a  right  of
recourse and for a sum less than its face value. The discounter is  free  to
deal with the Instrument as he pleases. Discount  is  a  negotiation.  Other
things being equal there is no practical or legal  distinction  between  the
ordinary negotiation of a bill and its being discounted except  in  the  sum
paid on it. Discounting is a means of lending as is pledge.”

It is stated in Byles on BILL OF EXCHANGE (24th  Edition)  at  page  282  as
follows:

“A banker clearly  gives  value  for  a  bill  when  he  discounts  it,  the
transaction consisting of the purchase of  the  bill  at  a  discount,  i.e.
allowing the interest for the time the bill  has  to  run,  subject  in  the
event of dishonour to a right of recovery from the person  for  whom  it  is
discounted.”

The practice of the Bank itself, at the time of discounting is as  disclosed
in the letter used to be sent along with the intimation  of  discount  which
showed that in case of delayed payment an overdue interest at  a  particular
rate had to be collected if  not  paid  on  presentation.  These  facts  are
sufficient to hold that the amount in question is interest under  Sec.  2(7)
of the Interest Tax Act.

It is settled law that interest  is  damages  or  compensation  for  delayed
payment of money due. Therefore the expression ‘compensation’ in Section  32
of the Negotiable Instruments Act will  include  interest  paid  by  way  of
damages or compensation for delayed payments.  We  have  already  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. 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.”  [at pages  610  –
611]



13.   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.

14.   On the other hand, the Madhya Pradesh High Court  in  Commissioner  of
Income-Tax v. State Bank of Indore, (1988) 172 ITR 24  has reasoned thus:-

“Now the right to charge the amount for delay in payment  of  bills  accrued
to the assessee by virtue of the provisions of section 32 of the  Negotiable
Instruments Act, 1881, and in accordance with the  terms  of  the  agreement
entered into by the assessee with its constituents  in  pursuance  of  which
bills were purchased by the assessee.  On  account  of  delayed  payment  of
bills purchased by the assessee, the assessee became entitled to  liquidated
damages by way of compensation, as stipulated in the  agreement.  The  right
to charge that amount by the assessee did not, therefore, arise  on  account
of any delay in repayment of any loan or advance made by the assessee.  That
right accrued on account of default in the payment of the bills. 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  both  interest  proper  and  interest  by  way  of
damages. But 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”. In our opinion, therefore, the Tribunal was  not  right
in holding that the amounts in question charged by the assessee for  delayed
payment of bills were in the nature of interest on advances and exigible  to
tax under the Interest-tax Act.” [at page 28]



The Kerala High Court in Commissioner  of  Income  Tax  vs.  State  Bank  of
Travancore, [1997] 228 ITR 40 (Ker), in arriving at the same  conclusion  as
the Madhya Pradesh High Court, has, however, adopted  a  different  line  of
reasoning  in the following terms:-

“These overdue bills are presented  to  the  bank  by  the  makers  for  the
purpose of their recovery. As far as the makers are concerned, there may  be
justified or required circumstances for them to approach the bank. The  bank
has ready facilities  for  recovery,  more  statutory  powers  of  stringent
character and, therefore, the practice  gets  established  that  the  makers
hand over the overdue bills to the bank for recovery. It is thereafter  that
the bank sets in motion. In other words, what is undertaken by the  bank  is
the recovery of the amount covered by the bill and in regard  to  which,  by
virtue of Section 32 of the Negotiable Instruments Act,  1881,  a  statutory
liability is created with regard to the prompt  payment.  The  details  that
are available in the context would show that the origin of the amount  which
is the subject-matter of an overdue bill gets snapped. In other  words,  the
moment the maker presents the overdue bill to  the  bank  for  recovery,  it
becomes a document negotiable in itself on its own strength  empowering  the
bank to effect recovery and creating  the  liabilities  of  the  parties  as
regards  prompt  payment  thereof.  In  such  a  situation,   ignoring   the
intermittent acrobatics as to  whether  the  amount  can  be  understood  as
interest or could continue to have  the  character  of  its  description  as
compensation  in  accordance  with  the  provisions  of  Section 32 of   the
Negotiable Instruments Act, 1881, would be wholly unnecessary, at least  for
the purpose of consideration  as  to  whether  the  amount  can  assume  the
character of "chargeable interest". It is elementary  in  the  context  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.”



15.   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.   In  addition,  the  Andhra  Pradesh  High
Court has reasoned thus:

“It is not uncommon  that  banks  purchase  Bills  of  Exchange  from  their
customers and make payments, on being satisfied  that  they  are  in  order.
Whenever the purchase of  Bills  of  Exchange  takes  place,  the  purported
transaction comes to be governed by Section 32 of the Negotiable  Instrument
Act. The basic transaction of  borrowing  and  lending  is  required  to  be
between the persons  described  as  "maker"  and  "acceptor"  under  Section
32  of the Negotiable Instrument Act. The person who purchased the Bills  of
Exchange  becomes  the  "bearer"  thereof.  Section  32  of  the  Negotiable
Instrument Act, defines the liability of the concerned persons to  discharge
their respective obligations. However, it is difficult to imagine  that  the
purchaser of the Bills of Exchange can  be  treated  as  a  person  who  has
advanced the loans, to the original borrower. For all practical  purposes  a
different transaction altogether, comes into existence.”


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, which is the impugned judgment  in  Civil  Appeal
No.4988 of 2015, has reasoned thus:-

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

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.

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 proposition of law that the way in which entries  are  made  by
an  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.

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.

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.”



We are of the view that the Karnataka High Court’s reasoning  is  fallacious
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:-

“Section  2(5)  defines  “chargeable  interest”  to  mean  total  amount  of
interest referred to in Section 5, computed  in  the  manner  laid  down  in
Section 6. In other words, the “scope of  chargeable  interest”  is  defined
under Section 5  whereas  “computation  of  chargeable  interest”  is  under
Section 6. Section 2(7) is the heart of the matter as  far  as  the  present
case is concerned.

In accounting sense, there is a  conceptual  difference  between  loans  and
advances on the one hand and investments on the  other  hand.  Section  2(7)
defines the  word  “interest”  to  mean  interest  on  “loans  and  advances
including commitment charges, discount on  promissory  notes  and  bills  of
exchange but not to include interest referred to under  Section  42(1-B)  of
the Reserve Bank of India Act, 1934 as well as discount on treasury  bills”.
Section 2(7), therefore, defines what is interest  in  the  first  part  and
that first part confines interest only  to  loans  and  advances,  including
commitment charges, discount on promissory notes and bills of exchange.

Pausing here, it is clear that the interest tax is meant to be  levied  only
on interest accruing on loans and  advances  but  the  legislature,  in  its
wisdom, has extended the meaning of the word “interest” to two other  items,
namely, commitment charges and discount on promissory  notes  and  bills  of
exchange. 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. The fact remains that interest  on  loans  and
advances will not cover under Section 2(7) interest on bonds and  debentures
bought by an assessee as and by way of “investment”. Even  the  exclusionary
part of Section 2(7) excludes only discount on treasury  bills  as  well  as
interest under Section 42(1-B) of the Reserve Bank of India Act, 1934.”  [at
paras 5 – 7]



16.   The Karnataka High Court’s view is directly contrary to  the  view  of
this Court, and, therefore, cannot be countenanced.   “Loans  and  advances”
has 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.  This is clear from the  use  of  the  word
“on” in Section 2(7) of the Act.  Interest payable “on”  a  discounted  bill
of exchange cannot therefore be equated with interest payable  “on”  a  loan
or advance. This being the case, it is clear that  the  reasoning  contained
in the High Courts  which  differ  from  the  Karnataka  view  is  obviously
correct but for the reasons given by us.

17.   It will be interesting to notice at this  stage  that  the  expression
“interest” is also  defined  under  the  Income  Tax  Act.   Section  2(28A)
defines interest as follows:-

“2. Definitions.--- In this Act, unless the context otherwise requires.

[(28A) “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  charge
in respect of the moneys borrowed or debt incurred  or  in  respect  of  any
credit facility which has not been utilized.]”



18.   It will be noticed that  this  definition  is  much  wider  than  that
contained in Section 2(7) of the Interest  Tax  Act,  1974.  The  expression
“payable in any manner in respect of any moneys borrowed” is  an  expression
of considerable width.  It will be noticed that the  aforesaid  language  of
the definition section contained in the Income Tax Act is broader than  that
contained in the Interest Tax Act in three respects.  Firstly, interest  can
be payable in any manner whatsoever.  Secondly, the  expression “in  respect
of”  includes interest arising even indirectly out of a  money  transaction,
unlike the word “on” contained in Section 2(7) which, we have already  seen,
connotes a direct arising of payment of interest out of a loan  or  advance.
 And thirdly, “any  moneys  borrowed”  must  be  contrasted  with  “loan  or
advances”.  The former expression  would  certainly  bring  within  its  ken
moneys borrowed by means other  than  by  way  of  loans  or  advances.   We
therefore conclude that 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.

19.   In fact, when we come to the second point  agitated  in  some  of  the
appeals by revenue namely as to whether guarantee fees paid to  the  Deposit
Insurance  and  Credit  Guarantee  Corporation  could  be  included  in  the
definition of interest in Section 2(7) of the Interest  Tax  Act,  1974,  it
will be clear that such definition does  not  include  any  service  fee  or
other charges in respect of monies borrowed or debt incurred,  again  unlike
the definition of ‘interest’ under the Income Tax Act.   We  find  that  the
Rajasthan High Court in the impugned judgment in  Civil  Appeal  No.4988  of
2015 is correct when it observed:-

“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 22 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.”

20.   In the circumstances, we dismiss the appeals of revenue and allow  the
appeals of the assessees and set aside the judgments in favour of revenue.



……………………J.

                                        (A.K. Sikri)







                                        ……………………J.

New Delhi;                                 (R.F. Nariman)

November 18, 2015



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