Andhra Pradesh H.C :The overdue interest on the demand bills is not chargeable to tax under the Interest Tax Act, 1974

High Court Of Andhra Pradesh

CIT, Ap-I, Hyderabad Vs. State Bank Of Hyderabad

Section : 2(7)

L. Narasimha Reddy And C. Kodanda Ram, JJ.

R.C. No. 46 Of 1999

June 10, 2014


L Narasimha Reddy, J. – This reference is made by the Income Tax Appellate Tribunal, Hyderabad B Bench at the instance of Commissioner of Income Tax, A.P.-I, Hyderabad framing the following question:

“Whether on the facts and in the circumstances of the case, the ITAT is correct in law in holding that the overdue interest on the demand bills is not chargeable to tax under the Interest Tax Act, 1974?”

2. The respondent is a Nationalised Bank and as part of its transactions, it undertakes several activities including lending of loans and purchasing of bills of exchange. The parliament enacted the Interest Tax Act, 1974 (for short the Act) providing for levy of tax on interest on loans and advances. The respondent submitted returns as required under the Income Tax Act, for the Assessment years 1976-1977 to 1979-80, 1981-82 to 1986-87, 1992-93 and 1993-94, before the concerned I.T.O. Several claims of deductions or recoveries were made under different heads.

3. One such recovery was the exemption from payment of tax for the amount representing the overdue interest on the demand bills, which are bills of exchange, purchased by the respondent. The I.T.O. treated such amounts as covered by the provisions of the Act and subjected them to levy of tax.

4. Appeals preferred by the respondent before the Commissioner were dismissed, following the judgment of the Karnataka High Court, reported in State Bank of Mysore v. CIT[1989] 175 ITR 607/[1988] 41 Taxman 275. Aggrieved by such orders, respondent filed batch of appeals before the Tribunal. Through its common order dated 22.10.1997 the Tribunal held that the amounts representing overdue interest on demand bills are not liable to be levied the tax under the Act. The Revenue was not satisfied with the outcome of the appeals and accordingly filed applications under Section 256 (1) of the Income Tax Act with a request to refer the common question to this Court. Through its order dated 26.5.1998, the Tribunal referred the question noted above.

5. Sri S.R. Ashok, learned standing counsel for the Income Tax Department submits that the Act takes in its fold, the interest liveable on loans and advances as well as the amounts covered by Bills of Exchange purchased by the Bank. He submits that once the respondent collected not only the principal and contracted rate of interest on the amount covered by the Bills of Exchange, but also the overdue interest for delayed payment the amount so recovered is also taxable. He submits that the Tribunal did not undertake an independent adjudication and simply by noticing that there is a conflict of view expressed by the different High Courts, has allowed the appeals, preferred by the respondent.

6. Sri Dwarakanath, learned counsel for the respondent, on the other hand, submits that the definition of interest, under Section 2(7) of the Act is restrictive in nature, and that it covers only interest on loans and advances and not the interest liveable on other transactions or occasions or purposes. He submits that the subject matter of the dispute before the various High Courts was straight away the loan lent by the Bank and the amount of interest levied, and that the High Courts treated the transactions under Section 32 of the Negotiable Instrument Act, as covered by the provisions of the Interest Act.

7. The controversy in this reference is in a narrow compass. This is as to whether that part of amount, recovered by a lender towards overdue interest on demand bills, is chargeable to tax under the Act. The phenomenon of levy of tax on interest charged and collected by certain agencies is separately introduced in the year 1974. It needs to be noted that the Parliament was so selective in levy of tax on interest, that it has enlisted the events in Section 2 (7) of the Act as under:

“2(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;”

8. If we take the language employed in the provision, into account, we gain an impression, that it is inclusive in nature. However, if the purport of the regulation is examined a bit deep, it becomes clear that it is restrictive in nature. The reason is that it is only the interest, that is liveable on loans and advances that becomes taxable. The fact that the levy of interest is almost restrictive in nature, is evident from the language employed in Section 6, read with sub section 5 of Section 2 of the Act, wherein the expression chargeable interest is defined.

9. Further, it is only the loans and advances, that are made by the scheduled banks, and not others, that are covered by the Act. This is evident from Section 4 which reads as under:

“4.(1) Subject to the provisions of this Act, there shall be charged on every scheduled bank for every assessment year commencing on or after the 1st day of April, 1975, a tax in this Act referred to as interest-tax in respect of its chargeable interest of the previous year at the rate of seven per cent of such chargeable interest:

(Other part of the Section, omitted, as not necessary for this case)”

10. In other words the loans and advances emanating from non schedule banks or private individuals are not covered by the Interest Act.

11. In case the respondent lent loans or made advances to its customers and in the process of recovery thereof, it has collected not only admitted rate of interest but also the penal interest for delayed payment, there is every possibility of treating the component of penal interest for delayed payment as forming part of interest and subjecting it to levy of tax. In the instant case, however, such is not the case. Though the facts are not stated, with required amount of clarity or elaboration, this much however can be culled out from the order of the assessment, that the transactions, as regards which tax was ordered to be levied are in the nature of purchase of Bills of Exchange.

12. It is not uncommon that banks purchase Bills of Exchange from their customers and make payments, on being satisfied that they are in order.

13. 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.

14. When the Act covers, just the interest on loans and advances, it is difficult to bring under its fold, the transaction of purchase of Bills of Exchange. Had the Parliament been of the view that a transaction purchase of bills of exchange is on par with the transactions of loans and advances and wanted to levy tax on every amount that is recovered in the form of interest, penal or otherwise, it would have certainly included such transactions in the definition clause or in the other charging sections.

15. That is not having been done, the assessing authority cannot be permitted to widen the scope of the Act.

16. We are in agreement with the view taken by the Tribunal in its order dated 22.10.1998, and accordingly, answer the reference in affirmative.

[Citation : 367 ITR 128]

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