2025 (6) TMI 1490 - HC - Income Tax

Subsidy received from Reserve Bank of India under the Export Credit (Interest Subsidy) Scheme 1968 - whether forms part of assessable interest under section 2 (7) of the Interest Tax Act 1974? - as contended that it is deferred or indirect interest income and the Court must look at the real nature of transaction nor merely its form or label and that Section 2 (7) of the Act uses the expression means and includes and therefore the expression includes suggests an inclusive and expansive scope which permits inclusion of indirect interest receipts which arise in relation to loan and advances. HELD THAT - In the instant case no loan or advance was given by the assessee to the RBI. Therefore any amount received by the assessee from the RBI in the form of a subsidy or compensation for loss on interest by whatever name it may be called would not convert the amount received by the assessee from the RBI to interest as defined u/s 2 (7) of the Act. The amount of subsidy received by the Assessee is not relatable in loan or advance given by the assessee to the RBI and therefore the amount of subsidy can neither be treated as commitment charges nor discount on promissory notes on bill of exchange drawn or made in India. Therefore the amount of subsidy received by the assessee from the RBI u/s 42(1B) of the RBI Act 1934 cannot be treated as interest chargeable under Section 4 of the Act. As pertinent to note that similar view was taken in Punjab National Bank 2008 (1) TMI 537 - DELHI HIGH COURT . Against the aforesaid decision of Delhi High Court the Revenue preferred an SLP before the Supreme Court which has been dismissed. Assessee appeal allowed.

Summary

The core legal question considered by the Court was whether the subsidy amounting to Rs. 12,93,55,595/- received by the Assessee from the Reserve Bank of India (RBI) under the Export Credit (Interest Subsidy) Scheme, 1968, constitutes "interest" under Section 2(7) of the Interest Tax Act, 1974, and thus forms part of the assessable interest income chargeable to interest tax.

Additional relevant issues included:

• The proper interpretation of the term "interest" as defined in Section 2(7) of the Interest Tax Act, 1974, including the scope of the inclusive term "includes."
• The nature and character of the subsidy payment from RBI-whether it is to be treated as interest income or as a non-interest subsidy/compensation.
• The applicability of judicial precedents, particularly decisions of the Supreme Court and various High Courts, on the interpretation of "interest" under the Interest Tax Act.
• The principle of strict construction of fiscal statutes and whether the subsidy falls within the four corners of the charging provisions.

Issue-wise Detailed Analysis:

1. Whether the subsidy received under the Export Credit (Interest Subsidy) Scheme constitutes "interest" under Section 2(7) of the Interest Tax Act, 1974

Relevant legal framework and precedents: Section 2(7) of the Interest Tax Act defines "interest" as interest on loans and advances made in India and "includes" commitment charges on unutilized credit and discount on promissory notes and bills of exchange, but excludes certain RBI Act related interest and treasury bill discounts. The definition's use of "includes" indicates an inclusive but not exhaustive scope.

Key precedents relied upon by the Assessee included:

• State Bank of Patiala v. Commissioner of Income-Tax (2016): The Supreme Court held that the scope of "interest" under Section 2(7) is not to be extended to any income booked as interest but not arising from loans or advances. The Court emphasized that Parliament deliberately excluded certain types of interest or penalties from the definition, indicating a narrow scope.
• Muthoot Leasing and Finance Ltd. v. Commissioner of Income-Tax (2023): It was held that interest tax applies only to interest arising directly from loans or advances, and not to income of a similar character but not directly linked to loans or advances. The Court reiterated the principle of strict construction of taxing statutes and rejected taxation by analogy or inference.
• Punjab National Bank v. Commissioner of Income-Tax (2011) (Delhi High Court): The Division Bench ruled that subsidies or compensations received do not constitute interest under Section 2(7). The Supreme Court dismissed the Revenue's Special Leave Petition against this decision, lending it authoritative weight.

Court's interpretation and reasoning: The Court analyzed the definition of "interest" in Section 2(7) and the nature of the subsidy. It held that the subsidy was not interest on any loan or advance made by the Assessee to the RBI. Since the Assessee did not lend money to the RBI, the subsidy cannot be considered interest arising from loans or advances made by the Assessee. The subsidy was characterized as compensation for loss of interest due to concessional export credit, but this compensation does not convert the subsidy into interest under the Act.

The Court noted that the definition of interest includes specific items such as commitment charges and discounts on promissory notes but excludes others, reflecting a deliberate legislative choice to limit the scope. The Court emphasized that the inclusive term "includes" does not permit expansion beyond the enumerated categories to cover indirect or deferred interest-like receipts.

Key evidence and findings: The subsidy was received under a government scheme administered by RBI, aimed at compensating banks for concessional interest rates on export credit. There was no evidence that the Assessee had made any loan or advance to RBI or that the subsidy represented interest on any such loan.

Application of law to facts: Applying the narrow and literal interpretation mandated by the Supreme Court's precedents, the Court found that the subsidy does not satisfy the statutory definition of interest under Section 2(7). The subsidy is a separate payment and not interest income arising from loans or advances made by the Assessee.

Treatment of competing arguments: The Revenue contended that the subsidy was deferred or indirect interest and that the Court should look at the substance over form, relying on the inclusive language of Section 2(7). The Court rejected this approach, holding that the strict letter of the law governs fiscal statutes and that the Revenue's interpretation would impermissibly broaden the taxing provision beyond its clear terms.

2. Applicability of judicial precedents and principle of strict construction of taxing statutes

Relevant legal framework and precedents: The Supreme Court's rulings in the State Bank of Patiala and Muthoot Leasing cases established that interest tax applies only to interest directly arising from loans or advances. The Court reiterated the principle that taxing statutes must be strictly construed and that liability cannot be imposed by analogy or inference.

Court's interpretation and reasoning: The Court emphasized that the taxing provision must be read strictly and literally. It cannot be extended by interpretation to include payments that do not fall within the explicit definition. The Court cited authoritative precedents to underscore that before taxing any person, it must be shown that the person falls within the ambit of the charging section by clear words used in the statute.

Application of law to facts: Since the subsidy did not fall within the four corners of the statutory definition of interest, the Court held that it cannot be taxed under the Interest Tax Act. The Court relied on the binding precedents, including the Delhi High Court's decision in Punjab National Bank which was upheld by the Supreme Court by dismissal of the Revenue's SLP.

Conclusions: The Court concluded that the subsidy received by the Assessee from RBI under the Export Credit (Interest Subsidy) Scheme, 1968, does not constitute interest within the meaning of Section 2(7) of the Interest Tax Act, 1974. Therefore, it is not assessable to interest tax under Section 4 of the Act.

Significant holdings:

"In our view, the scope and definition of the term 'interest' cannot be interpreted to bring within its fold any income that is booked by an assessee under the head interest. The character of an overdue bill is not synonymous with the loans and advances and, therefore, it will not fall within the ambit and scope of interest under section 2 (7) of the Interest-tax Act. Parliament in its own wisdom has not included any amount that is recovered in the form of interest, penalty or otherwise under the definition of interest and had it been so, such nature of amount as contended by the Revenue could have been brought within the ambit and scope of interest."

"Interest is chargeable to tax under the Act only if it arises directly from a loan or advance and not otherwise. It is well settled in law that in construing fiscal statutes and in determining the liability of the subject to tax one must have regard to the strict letter of law. It is equally well settled legal proposition that if a case is not covered within the four corners of provision of taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature."

The Court's final determination was to answer the substantial question of law in the negative, quash and set aside the impugned orders of the Tribunal and allow the appeal filed by the Assessee.