Legal Wrangle - Episode 33 (Direct & International Tax) 

CASE LAW

2015-TIOL-276-SC-IT + Story

STATE BANK OF PATIALA Vs CIT : SUPREME COURT OF INDIA (Dated: November 18, 2015)

Interest tax - Sections 2(7) & 4 - Income tax - Sec 2(28A) - Negotiable Instrument Act - Section 32

Keywords: bill of exchange - compensation - commission - chargeable interest - interest on loans or advances - deeming fiction - loans or advances vs discount.

Whether discounts are different from loans and advances for the purpose of provisions of interest tax act - YES: SC

Whether payment made for default under discounted bill of exchange is akin to interest charged on loans & advances and thus, chargeable to interest tax - NO: SC

Whether interest payable on a discounted bill of exchange can be equated with interest payable on a loan or advance - NO: SC

Whether the expression "interest" as defined under the Income Tax Act is much wider than the one used in the Interest Tax Act - YES: SC

The assessee-bank makes purchases of bills of exchange from its customers and charges commission for services rendered. 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.

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.

On appeal, the Apex Court held that,

++ the entire case hinges on the construction of Section 2(7) of the Interest Tax Act, 1974. 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%;

++ 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;

++ 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;

++ 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;

++ 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";

++ 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;

++ 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;

++ 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;

++ 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;

++ 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.

Revenue's appeal dismissed