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2018 (10) TMI 297 - HC - Income TaxLevy of interest tax on the penal/default interest collected - whether Penal interest collected would fall within the ambit of the Interest Tax Act u/s 2(7) of the Interest Tax Act - Held that:- The High Court of Karnataka, in the case of State Bank of Mysore vs. Commissioner of Income-tax reported in (1988 (6) TMI 21 - KARNATAKA HIGH COURT) held that interest is the damages or compensation for delayed payment of money due and therefore, the expression 'compensation' in Section 32 of the Negotiable Instruments Act, will include interest paid by way of damages or compensation for delayed payments. It was further, held that any amount collected by the Bank cannot be anything but interest, whatever may be the nomenclature, and is chargeable interest for the purpose of Interest Tax Act. "Loans and advances” has been held to be different from discounts and legislature has kept in mind the difference between the two and it is clear 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 and this right arose on account of default in payment of amounts due under a discounted bill of exchange. It was held that a subject can be brought to tax only by a clear statutory provision in that behalf and interest is chargeable to tax under Interest Tax Act only if it arises directly from a loan or advance. This finding was explained by stating that it is clear from the use of the word “on” in Section 2(7) of the Interest Tax Act that interest payable “on” a discounted bill of exchange cannot be equated with interest payable “on” a loan or advance.
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