The Supreme Court was concerned 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 arose is whether such payment of compensation to the said banks is \u201cinterest\u201d liable to tax under the Interest Tax Act, 1974. HELD by the Supreme Court decising in favour of the assessee: <\/p>\n
(i) We are of the view that the Karnataka High Court\u2019s reasoning in State Bank of Mysore v. Commissioner of I.T., Karnataka-I, Bangalore, (1989) 175 ITR 607 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 \u201cinterest\u201d to include discount on bills of exchange. Indeed, this matter is no longer res integra. The Karnataka High Court\u2019s view is directly contrary to the view of this Court in CIT v. Sahara India Savings & Investment Corpn. Ltd., (2009) 17 SCC 43, and, therefore, cannot be countenanced. \u201cLoans and advances\u201d has been held to be different from \u201cdiscounts\u201d 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 \u201con\u201d in Section 2(7) of the Act. Interest payable \u201con\u201d a discounted bill of exchange cannot therefore be equated with interest payable \u201con\u201d 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.<\/p>\n
(ii) It will be noticed that the definition in Section 2(28A) of the Income-tax Act is much wider than that contained in Section 2(7) of the Interest Tax Act, 1974. The expression \u201cpayable in any manner in respect of any moneys borrowed\u201d 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 \u201cin respect of\u201d includes interest arising even indirectly out of a money transaction, unlike the word \u201con\u201d 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, \u201cany moneys borrowed\u201d must be contrasted with \u201cloan or advances\u201d. 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.
\n(iii) 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 \u2018interest\u2019 under the Income Tax Act. 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 \u201cany service fee or other charges in respect of money charge or debt incurred.\u201d 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 and mere crediting the said amount as interest will certainly not entitle the revenue to treat the same as interest. 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.<\/p>\n
(State Bank of Mysore v. Commissioner of I.T., Karnataka-I, Bangalore, (1989) 175 ITR 607 and CIT v. State Bank of Patiala, (2008) 300 ITR 395 (P&H) reversed; Commissioner of Income-Tax v. State Bank of Indore, (1988) 172 ITR 24 Commissioner of Income Tax vs. State Bank of Travancore, [1997] 228 ITR 40 (Ker), Commissioner of Income Tax v. State Bank of Hyderabad, [2014] 367 ITR 128 (AP) Commissioner of Income Tax v. Cholamandalam Investment and Finance Co. Ltd., [2008] 296 ITR 601 (Mad) affirmed)<\/p>\n","protected":false},"excerpt":{"rendered":"
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 \u201cinterest\u201d to include discount on bills of exchange. Indeed, this matter is no longer res integra. The Karnataka High Court\u2019s view is directly contrary to the view of this Court in CIT v. Sahara India Savings & Investment Corpn. Ltd., (2009) 17 SCC 43, and, therefore, cannot be countenanced. \u201cLoans and advances\u201d has been held to be different from \u201cdiscounts\u201d 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.<\/p>\n