Karnataka H.C : Whether, on the facts and circumstances of the case, the overdue interest on the demand bills is ‘interest’ within the meaning of s. 2(7) of the Interest-tax Act, 1974 ?

High Court Of Karnataka

State Bank Of Mysore vs. CIT

Section INT 2(7)

Asst. Year 1976-77

S.A. Hakeem & S. Rajendra Babu, JJ.

IT Ref. Case No. 74 & 75 of 1981

15th June, 1981

Counsel Appeared

G. Sarangan, for the Petitioner : K. Srinivasan & H. Raghavendra Rao, for the Respondent

RAJENDRA BABU, J.:

The assessee is a banking company. The assessee filed a return for the year 1976-77 admitting chargeable interest of Rs. 10,17,25,410. The assessee claimed that rediscount charges paid of Rs. 36,40,206 and interest earned on overdue bills of Rs. 84,77,124 should not be taxed. The ITO rejected both these claims and brought the two sums to tax. On appeal, the AAC confirmed the said order. On further appeal, the Tribunal held that in respect of tie rediscount, the assessee was entitled to a deduction, but, on the other question, agreed with the AAC that the interest is charged for the user of the funds beyond the stipulated time and the transaction results in earning of interest within the meaning of s. 2(7) of the Interest-tax Act, 1974, and upheld the assessment on this item.

2. Three questions have been referred by the Tribunal for our opinion and they are :

“1. Whether, on the facts and circumstances of the case, the overdue interest on the demand bills is ‘interest’ within the meaning of s. 2(7) of the Interest-tax Act, 1974 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the contention of the assessee that the sum of Rs. 36,40,206 representing the 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 ?

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the transaction between the assessee and the Industrial Development Bank of India in connection with rediscounting of bills under the scheme of refinancing by the Industrial Development Bank of India and a similar scheme of the Reserve Bank of India is a joint venture whereby the Industrial Development Bank of India and the bank joined together in working out a scheme whereby the purchasers are enabled to pay the price in instalments and hence the interest paid by them, i.e., the purchasers, is to be shared between the two parties, viz., Reserve Bank of India and Industrial Development Bank of India ?”

3. At the instance of the assessee, the first question in relation to the overdue interest and demand bills has been referred while the other two questions on deduction in relation to the rediscounting have been referred at the instance of the Department.

So far as the second question relating to the rediscounting of bills is concerned, the same is covered by our order in ITRC No. 33 of 1981 disposed of on 10th June, 1988 (CIT vs. Canara Bank (1989) 175 ITR 601 ). Now, the only question that remains for consideration is whether the overdue interest on the demand bills is “interest” within the purview of s. 2(7) of the Interest-tax Act.

4. Sarangan, learned counsel for assessee, relying on a decision of the Madhya Pradesh High Court in CIT vs. State Bank of Indore (1988) 69 CTR (MP) 147 : (1988) 172 ITR 24 (MP) 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 the Interest-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 the bills cannot be held to be “interest on loans and advances” and it was not exigible to tax under the Interest-tax Act. He also relied upon s. 32 of the Negotiable Instruments Act, 1881, and contended that the said provision contemplates only compensation and not interest at all. When the bank discounts a bill, what happens is that 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 Edn., at p. 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 Bills of Exchange (24th Edn.), at p. 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, 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 s. 2(7) of the Interest-tax Act.

5. It is settled law that interest is damages or compensation for delayed payment of money due. Therefore, the expression “compensation” in s. 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 by a bank to its customer 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 the Interest- tax Act. With great respect to the learned Judges of the Madhya Pradesh High Court, we cannot subscribe to their view that discounting of bills is not a means of lending. In any event, in the present case, there is a specific agreement between the parties to pay overdue interest at a particular rate if the amount is not paid on presentation of the bill within the time stipulated. When there is an agreement between the parties to pay interest, no other question would arise for consideration at all. Therefore, on this question, we have to answer in the affirmative, i.e., against the assessee and in favour of the Department.

[Citation : 175 ITR 607]

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