Rajasthan H.C : Whether the interest/penal interest charged by the bank on delayed payment of instalments in recurring deposit account by the depositor can be subjected to levy of tax under the provisions of the Interest-tax Act, 1974

High Court Of Rajasthan

CIT vs. Bank Of Rajasthan Ltd.

Section INT 2(7)

Asst. Year 1996-97, 1997-98

N. P. Gupta & Kishan Swaroop Chaudhari, JJ.

IT Appeal Nos. 100, 141, 115, 120 of 2006

28th August, 2008

Counsel Appeared :

K.K. Bissa, for the Appellant : Ramit Mehta, for the Respondent


By the court :

These four appeals arise out of three different orders of the Tribunal and relate to the same assessee but two different assessment years.

2. The basic judgment of the Tribunal is under challenge in Appeals Nos. 115 of 2006 and 120 of 2006, being dt. 31st March, 2005, relating to the asst. yrs. 1996-97 and 1997-98. The question involved in all these four appeals is common, being as to whether the interest/penal interest charged by the bank on delayed payment of instalments in recurring deposit account by the depositor can be subjected to levy of tax under the provisions of the Interest-tax Act, 1974 ? and therefore, all these appeals are being decided by this common order. The facts, being not in dispute, need not detain us inasmuch as the controversy in all the appeals is only about various amounts of interest recovered by the assessee from customers/depositors under the nomenclature of penal interest, for late deposit of requisite instalments on or before the stipulated dates on all the recurring savings deposit accounts. The AO found the amount to be taxable under the provisions of the Interest-tax Act which was affirmed by the CIT. In appeal, the Tribunal observed that penal interest charged by the bank on failure to deposit the instalment of recurring deposit account in time by the customers cannot be equated with interest on “loans and advances”, whereas the Act envisages charging of tax on interest on “loans and advances”, the deposits have been kept away from its pocket. Reliance was also placed on a Delhi Bench judgment of the Tribunal in the case of Oriental Insurance Co. Ltd. vs. Dy. CIT (2004) 82 TTJ (Del) 1084 : (2004) 89 ITD 520 (Del), wherein it was held that the Interest-tax Act applies only on the interest on “loan and advances” and not on deposits. Thus, the addition made by the AO and confirmed by the CIT was set aside.

3. Arguing the appeal, learned counsel for the Revenue relied upon two judgments of the Karnataka High Court, being in the case of CIT vs. Canara Bank (1989) 175 ITR 601 (Kar) and State Bank of Mysore vs. CIT (1988) 74 CTR (Kar) 52 : (1989) 175 ITR 607 (Kar) reported in the same volume at p. 607.

4. On the other hand, learned counsel for the assessee supported the impugned judgment by relying on the basic language of the definition of interest given in section 2(7) of the Interest-tax Act, 1974. We have considered the submissions and have gone through the judgments relied upon by the learned counsel for the appellant. In our view, the two judgments relied upon are distinguishable on facts inauch as in Canara Bank’s case (supra), the matter involved was about the Industrial Development Bank of India’s Bills Re-discounting Scheme. In that case, the whole transaction was based upon pre-existing agreement between parties, including IDBI and the assessee- bank was only found to be a medium or a conduit pipe for disbursement of development fund for implementation of the Scheme. Rediscounting interest paid on bills to RBI or IDBI did not accrue or arise to the assessee-bank and thus was not found to be forming part of chargeable interest under the Act. Likewise, in State Bank of Mysore’s case (1989) 175 ITR 607 (Kar) also, the matter was regarding discounting of bills, which was found to be a form of loan or advance and it was held that interest earned on overdue bills by the banks is damages or compensation for delayed payment of money due and thus was found to be chargeable to tax. As against this, we may gainfully quote the provisions of s. 2(7), which define “interest”, for the purpose of the said Act, which reads 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-s. (IB) of s. 42 of the Reserve Bank of India Act, 1934 ; (ii) discount on treasury bills ;”

Thus, from the reading of this definition, it is clear that, firstly, the definition is not inclusive one and it defines interest to mean interest on loans and advances made in India. Obviously, the two items, which are purported to be included in the definition are not relevant for the present controversy. Thus, in the very nature of things, for attracting the provisions of the Act, the interest must be interest received or being receivable in certain circumstances on the loans and advances made in India. At this stage also, reference may be made to the objects and reasons being to impose a special tax on total amount of interest received by the scheduled banks on loans and advances made in India. Learned counsel for the appellant submits that delayed payment of instalments of R.D. account should be taken to be a “loan or advance” and, therefore, the interest earned thereon is exigible to tax. We are afraid this interpretation cannot be accepted inasmuch as even taking the case on the highest, the liability of the depositor to pay the instalments on or before specified date can at best be said to be a commitment on his part and the penal interest is charged for not keeping up the commitment but then on any parameters it cannot be said that the amount of instalments was required to be deposited by the depositor in the recurring deposit account was an advance or loan by the bank to the account holder. When, the instalments is paid or not paid the amount moves or may not move from the pocket of the depositor but then it never moves from the pocket of the bank to the pocket of the depositor while inherently in case of loan or advance the fund has to move from the pocket of bank or the person advancing the loan. Thus, in our view, it cannot be said that the interest or penal interest charged by the assessee on the delayed payment of instalments by the depositors of the recurring deposit accounts, is exigible to tax, under the provisions of the Interest-tax Act, 1974. Thus, the question is answered against the Revenue, and in favour of the assessee. The appeals have, thus, no force and are dismissed.

[Citation : 323 ITR 524]

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