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2015 (10) TMI 1521 - GUJARAT HIGH COURT

2015 (10) TMI 1521 - GUJARAT HIGH COURT - [2015] 378 ITR 632 (Guj) - Interest tax - accrual of income - whether Amount collected by the assessee bank from its borrowers as amount for interest tax, was not part of the interest on loans and advances within the meaning of section 2(7) read with section 2(5), 5 and 6 of the Interest Act, 1974 ? - Held that:- Even though the amount of interest tax is recovered by the assessee from its customers, the income in actual fact never reaches the assessee, w .....

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owers/customers towards payment of interest tax as expressly provided therefor by the RBI guidelines cannot be taken into consideration for the purpose of computing chargeable interest. Therefore, when the nature of the amount collected by the assessee does not fall within the ambit of chargeable interest as contemplated in subsection (5) of section 2 of the Act, the same cannot be taken into consideration while computing the chargeable interest. Consequently, the explanation to section 6 on whi .....

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y the assessee, namely, interest on loans and advances plus the amount collected from the customer towards interest tax, which would exceed the amount collected from the customer towards interest tax, thereby frustrating the very intention of the RBI guidelines, namely, to collect interest tax from the customer and not from the bank. - Decided in favour of the assessee - TAX APPEAL NO. 207 & 208 of 2002 - Dated:- 1-9-2015 - MS. HARSHA DEVANI AND MR. A.G.URAIZEE, JJ For the Petitioner : Mr Manish .....

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essment years 1995-96 and 1996-97 respectively. 2. By an order dated 19.7.2002, this court had admitted the appeals on following substantial question of law:- Whether the Appellate Tribunal is right in law and on facts in holding that amount of ₹ 4,26,05,914/- collected by the assessee bank from its borrowers as amount for interest tax, was not part of the interest on loans and advances within the meaning of section 2(7) read with section 2(5), 5 and 6 of the Interest Act, 1974 ? 3. In pro .....

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assessee from its borrowers/clients and were, therefore, outside the purview of chargeable tax as defined in the Act. 4. The Assessing Officer disallowed the claim mainly on the ground that the assessee had included the said interest in the return and no claim had been made by the assessee on this point by filing even a revised return as also on the ground that in the earlier years, the claim had been disallowed. 5. The Commissioner of Income Tax (Appeals) in the assessee s appeal, held that as .....

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erest on loans and advances and, therefore, it formed part of the chargeable interest. According to the Commissioner (Appeals), neither the Act nor the guidelines of the RBI state that the nature of such enhanced interest would cease to be interest. It is well settled law that an entry by an accountant cannot change the nature of the income. Thus, a different treatment given by the bank to the enhanced interest charged in its books of account cannot change the nature of this accrual. 6. The Trib .....

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he court to the provisions of the Act to point out that sub-section (7) of section 2 of the Act defines interest , to mean any interest on loans and advances. It was submitted that what is collected by the assessee is interest, may be, it includes interest payable under the Interest Tax Act, nonetheless, it is in the nature of interest as contemplated under sub-section (7) of section 2 of the Act. Reference was made to the provisions of section 6 of the Act which provides for computation of char .....

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interest established to have become a bad debt, and that other than that no other deduction is permissible. It was argued that thus, the explanation gives a complete answer, namely that, except for what is expressly provided therein, there can be no further deduction. According to the learned counsel, the amount that the assessee collects from the borrowers is towards loan and advances and thus, it is the gross amount of interest that is collected and no amount is separately collected towards i .....

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recover the interest chargeable under the Interest Tax Act from the borrowers and that the tax collected for payment of interest is not synonymous with interest collected against the loan or advance made by the assessee. It was submitted that the assessee was merely an agent insofar as collection of the amount of interest tax is concerned, because of the overriding title of the Government. It was, accordingly, urged that the view adopted by the Tribunal being just, legal and proper and does not .....

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o the decision of the Madras High Court in the case of Bank of Madura Limited (supra) to point out that the theory of diversion at source has not been accepted by that court. It was further submitted that in the case of Bank of Madura Limited (supra), the court has not considered the Explanation to section 6 of the Act which provides for that no deduction other than that specified in that sub-section shall be allowed from the total amount of interest accruing or arising to the assessee while com .....

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interest of the previous year. The Reserve Bank of India issued guidelines whereby the banks were advised to pass on the incidence of interest tax, pro rata, to their borrowers, irrespective of the category of borrowers or the types of advances. Accordingly, the assessee bank collected such interest amount from the borrowers. However, while filing return of income, such amount collected from the borrowers towards interest payable under the Act was offered for tax. During the course of assessmen .....

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plated under the Act. The Tribunal has followed the decision of the Madras High Court in the case of Commissioner of Incometax v. Bank of Madura Limited (supra) and directed that such amounts be deducted from the amount of chargeable interest returned by the assessee. 11. Before adverting to the rival contentions, reference may be made to the relevant provisions of the Act. Sub-section (5) of section 2 of the Act defines, chargeable interest to mean the total amount of interest referred to secti .....

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n treasury bills; 12. Thus, interest as provided under sub-section (7) of section 2 of the Act, means interest on loans and advances made in India inclusive of the categories enumerated thereunder. A perusal of the categories mentioned thereunder clearly shows that interest tax collected from borrowers does not find place therein. As noticed earlier, the amount payable towards interest tax has been collected from the borrowers/customers in view of the guidelines issued by the RBI. In the opinion .....

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perusal of the scheme of the Act reveals that section 4 is the charging section and as it stood at the relevant time it provided that subject to the provisions of the Act, there shall be charged on every scheduled bank for every assessment year commencing on or after the 1st day of April, 1975, a tax (in the Act referred to as interest tax) in respect of its chargeable interest of the previous year at the rate of seven per cent of such chargeable interest. The proviso thereto says that the rate .....

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section 5 of the Act which makes provision for Scope of chargeable interest and says that subject to the provisions of the Act, the chargeable interest of any previous year shall be the total amount of interest (other than interest on loans and advances made to other credit institutions or to any cooperative society engaged in carrying on the business of banking) accruing or arising to the credit institution in that previous year. Thus, chargeable interest is the total amount of interest accruin .....

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d hereinabove, the interest charged by the assessee on the loans and advances given to the customers is in terms of the rates specified in the respective agreement granting such loan or advance. The additional amount towards payment of interest tax in the light of the guidelines issued by the Reserve Bank of India is collected towards payment of interest tax. It has been contended on behalf of the respondent assessee that such amount of interest tax in view of the overriding title of the Governm .....

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ng title is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, .....

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so, not as part of his income, but for and on behalf of the person to whom it is payable. Thus, where the assessee collects the amount, not as a part of his income but for and on behalf of the person to whom it is payable, the same would fall within the first category of cases. Examining the facts of the present case in the light of the principles enunciated in the above decision, even though the amount of interest tax is recovered by the assessee from its customers, the income in actual fact n .....

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hargeable interest of a previous year, there shall be allowed from the total amount of interest (other than interest on loans and advances made to credit institutions) accruing or arising to the assessee in the previous year, a deduction in respect of the amount of interest which is established to have become a bad debt during the previous year. The explanation thereto provides that in computing the chargeable interest of a previous year, no deduction, other than the deduction specified in the s .....

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nterest accruing or arising to the assessee. From the facts as emerging from the record, it is manifest that the interest which accrues or arises to the assessee bank is the interest chargeable on the loans and advances to the extent agreed between the parties. As discussed hereinabove, the additional amount charged from the assessee payable towards interest tax cannot in any manner be said to be interest which has accrued or arisen to the assessee. Therefore, such amount collected from the borr .....

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