TMI Blog2011 (5) TMI 828X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellant. Pankaj Jain, D.K. Goyal and Rishab Kapoor for the Respondent. JUDGMENT Ajay Kumar Mittal, J. This appeal has been filed by the revenue under Section 21 of the Interest Tax Act, 1974 (in short "1974 Act") read with Section 260A of the Income Tax Act, 1961 (hereinafter referred to as "the Act") against the order dated 31.3.2005 passed by the Income Tax Appellate Tribunal, Chandigarh Bench "A", Chandigarh (for short "the Tribunal") in Interest Tax Appeal No. 7/Chandi/2002, relating to the assessment year 1998-99. The appeal was admitted by this Court vide order dated 20.11.2007 for determination of the following substantial question of law:- "Whether on the facts and in the circumstances of the case, the ITAT was right in law in holding that the revenue authorities were not justified in including the sum of Rs.1,99,89,630/- being interest tax recovered from the customers as chargeable to interest tax?" 2/3. Briefly stated, the facts necessary for adjudication as narrated in the appeal are that the assessee is a credit institution earning interest and filed its return of chargeable interest on 30.11.1998 declaring total chargeable interest at Rs.99 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the credit institution before October 1, 1991. It would be "lawful" for the credit institution to vary the agreement as regards rate of interest only for the purpose of recovering the amount of interest-tax payable by the credit institution, and, a fortiori, nothing over and above the same. Such increase in the rate of interest would be (a) to the extent to which such institution is liable to pay the interest-tax; (b) in relation to the amount of interest on the term loan; and (c) which is due to the credit institution. Increase in the rate of interest in terms of section 26C has a direct nexus with the statutory impost of interest-tax. Since increase in interest in a justifiable manner pertains to passing on the burden of interest-tax, it cannot be claimed that the increase in interest is done in the exercise of the contractual right of credit institution to increase the rate of interest. Nothing can be realised by way of tax or burden akin thereto which has not been authorized by Parliament." 7. Controverting the aforesaid submission, learned counsel for the assessee vehemently submitted that the Tribunal was right in holding that the interest tax was not includable in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest accruing or arising after the 31st day of March, 1983 shall be three and a half per cent of such chargeable interest. (2) Notwithstanding anything contained sub-section (1) but subject to the other provisions of this Act, there shall be charged on every credit institution for every assessment year commencing on and from the 1st day of April, 1992, interest-tax in respect of its chargeable interest of the previous year at the rate of three per cent of such chargeable interest. Provided that the rate at which interest-tax shall be charged in respect of any chargeable interest accruing or arising after the 31st day of March, 1997, shall be two per cent, of such chargeable interest." 12. Section 5 deals with the scope of chargeable interest whereas Section 6 relates to computation of chargeable interest, which read thus:- "5. Scope of chargeable interest. - Subject to the provisions of this Act, the chargeable interest of any previous year of a credit institution shall be the total amount of interest (other than interest on loans and advances made to other credit institutions or to any co-operative society engaged in carrying on the business of banking accruing or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rve Bank of India Act, 1934 ; and (ii) discount on treasury bills. Section 4 deals with charge of interest tax. Section 5 relates to the scope of chargeable interest as the total amount of interest (other than interest on loans and advances made to scheduled banks) accruing or arising to the bank or credit institution in that previous year. Section 6 is the computation section providing for determining the total assessable interest for levy of interest tax. A combined reading of the aforesaid provisions show that it is only the chargeable interest on which interest tax is payable by a Credit Institution under the 1974 Act. 14. We now proceed to refer to Section 26C of the 1974 Act on which the revenue had placed heavy reliance. Section 26C defines powers of Credit Institutions to vary agreement in the following terms:- "26C. Power of credit institutions to vary certain agreements. - Notwithstanding anything contained in any agreement under which any term loan has been sanctioned by the credit institution before the Ist day of October, 1991, it shall be lawful for the credit institution to vary the agreement, so as to increase the rate of interest stipulated therein to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Section 2(28A) of the Income-tax Act and Section 2(7) of the Interest-tax Act. Therefore, we hold that the Interest-tax Act will not apply to interest received by the assessee-bank on securities/debentures held by the assessee under the category "permanent". 16. Section 26C of the 1974 Act empowers a credit institution to vary terms of agreement with the borrowers to the extent of liability of interest tax under the 1974 Act, where the term loan had been sanctioned prior to Ist October, 1991. The ultimate destination of interest tax collected by the assessee under the 1974 Act is the Government treasury and no benefit accrues to the assessee. The receipt is infact interest tax on interest and is not in the nature of chargeable interest. Therefore, the interest tax which is collected by assessee cannot partake the character of chargeable interest which is in addition to interest paid by the customer to the assessee and no interest tax would be exigible on it. 17. The Madras High Court in Bank of Madura Ltd's case ( supra ) delving into identical issue involved herein, after considering the judgments in State Bank of Indore and Canara Bank's cases ( supra ) had held th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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