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2015 (11) TMI 869 - SUPREME COURT

2015 (11) TMI 869 - SUPREME COURT - [2016] 383 ITR 244 - Payment of compensation to the said banks - whether is “interest” liable to tax under the Interest Tax Act, 1974? - interest received by various banks after bills of exchange have been discounted 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 - Held that:- Section 2(7) itself makes a distinction between loans and advances made in India and disco .....

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ection 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 “in respect of” includes interest arising even indirectly out of a money transaction, unlike the word “on” 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, “any moneys borrowed” must be contrasted with “loan o .....

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hether 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 ‘interest’ under the Income Tax Act. - Decided in favour of assessee. - Civil Appeal Nos. 5212-5220 of 2007 - Dated:- 18-11-2015 - A. K. Sikri And R. F. .....

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4991 OF 2015 CIVIL APPEAL NO.4992 OF 2015 CIVIL APPEAL NO.4993 OF 2015 CIVIL APPEAL NO.4994 OF 2015 CIVIL APPEAL NO.4995 OF 2015 CIVIL APPEAL NO.4996 OF 2015 CIVIL APPEAL NO.4997 OF 2015 CIVIL APPEAL NO.4986 OF 2015 CIVIL APPEAL NO.5328 OF 2015 CIVIL APPEAL NO.3381 OF 2015 CIVIL APPEAL NO.3382 OF 2015 JUDGMENT R. F. Nariman, J. 1. Leave granted in special leave petition (civil) nos. 13359 of 2015 and 13357 of 2015. 2. There are 25 appeals that have been posted for hearing before us. They are con .....

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of exchange from its customers and charges commission thereon for services rendered by it. The discounted bills so purchased are then presented to the parties concerned for realization. If on presentation the bill is realized within time, no charges are levied by the bank. In case the bills are not realized in time but the other party pays the value of the bill beyond the stipulated time, a certain amount in the form of interest is charged by the bank on a fixed percentage basis for every day of .....

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and have stated that such amount would be so chargeable. 5. The entire case hinges on the construction of Section 2(7) of the Interest Tax Act, 1974 which defines interest as follows:- Section 2(7), Interest Tax Act, 1974 2. In this Act, unless the context otherwise requires, - (7) "interest" means interest on loans and advances made in India and includes- (a) commitment charges on unutilised portion of any credit sanctioned for being availed of in India; and (b) discount on promissory .....

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nterest Tax Act, 1974 is a narrow one, and is exhaustive as it is a means and includes definition. In P. Kasilingam v. P.S.G. College of Technology, 1995 Supp (2) SCC 348, this Court, when dealing with The Tamil Nadu Private Colleges (Regulation) Act, 1976, stated as follows:- A particular expression is often defined by the Legislature by using the word means or the word includes . Sometimes the words means and includes are used. The use of the word means indicates that definition is a hard-and- .....

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lause declares that they shall include. The words means and includes , on the other hand, indicate an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expressions . (See : Dilworth v. Commissioner of Stamps [1899 AC 99, 105-106 : (1895-9) All ER Rep Ext 1576] (Lord Watson); Mahalakshmi Oil Mills v. State of A.P. [(1989) 1 SCC 164, 169 : 1989 SCC (Tax) 56] [at para 19] 8. The precise question that arises before us is whether c .....

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respectively, and the acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand. In default of such payment as aforesaid, such maker or acceptor is bound to compensate any party to the note or bill for any loss or damage sustained by him and caused by such default. 9. It will be seen that when default of payment takes place, the acceptor of the bill of exchange is bound to compensate any party to the bill for any loss or damage sustained by hi .....

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me within the expression loans and advances made in India , and consequently any amount that becomes payable by way of compensation after a bill is discounted by the Bank would not be an amount which would be on loans and advances made in India . 11. Shri A.K. Sanghi, learned senior advocate appearing on behalf of the revenue basically placed for our consideration the reasoning of the Karnataka High Court judgment and adopted that reasoning as his argument. On the other hand, Shri Sanjay Jhanwar .....

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into a relationship of debtor and creditor with the bank. It thus becomes imperative to first find out what in fact the High Courts have held on this vexed question. 12. The Karnataka High Court in State Bank of Mysore v. Commissioner of I.T., Karnataka-I, Bangalore, (1989) 175 ITR 607, has reasoned thus: Sri Sarangan, learned counsel for assessee relying on a decision of the Madhya Pradesh High Court in C.I.T. v.State Bank of Indore (69 CTR (MP) 147) contended that though this sum of money may .....

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the said provision contemplates only compensation and not the interest at all. When the Bank discounts a bill what happens is the drawee gets a credit from the Bank to the extent of the amount covered by the Bill. This position has been explained in LAW OF BANKING By Paget, 9th Edition at page 415 thus: The discount of a bill is the purchase of it with, normally, a right of recourse and for a sum less than its face value. The discounter is free to deal with the Instrument as he pleases. Discount .....

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o run, subject in the event of dishonour to a right of recovery from the person for whom it is discounted. The practice of the Bank itself, at the time of discounting is as disclosed in the letter used to be sent along with the intimation of discount which showed that in case of delayed payment an overdue interest at a particular rate had to be collected if not paid on presentation. These facts are sufficient to hold that the amount in question is interest under Sec. 2(7) of the Interest Tax Act .....

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its customer by a Bank and if that be the true position as indicated by Paget any amount collected by the Bank for delayed payment of that amount cannot be anything but interest, whatever may be the nomenclature, and is chargeable interest for the purpose of Interest Tax Act. [at pages 610 - 611] 13. The Punjab and Haryana High Court in CIT v. State Bank of Patiala, (2008) 300 ITR 395 (P&H) has merely reiterated the aforesaid view. 14. On the other hand, the Madhya Pradesh High Court in Com .....

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ecame entitled to liquidated damages by way of compensation, as stipulated in the agreement. The right to charge that amount by the assessee did not, therefore, arise on account of any delay in repayment of any loan or advance made by the assessee. That right accrued on account of default in the payment of the bills. It may be that the amount payable by way of compensation for detention of a sum of money due, can be said to be covered by the expression interest in its widest sense, including bot .....

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erest-tax Act. [at page 28] The Kerala High Court in Commissioner of Income Tax vs. State Bank of Travancore, [1997] 228 ITR 40 (Ker), in arriving at the same conclusion as the Madhya Pradesh High Court, has, however, adopted a different line of reasoning in the following terms:- These overdue bills are presented to the bank by the makers for the purpose of their recovery. As far as the makers are concerned, there may be justified or required circumstances for them to approach the bank. The bank .....

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e details that are available in the context would show that the origin of the amount which is the subject-matter of an overdue bill gets snapped. In other words, the moment the maker presents the overdue bill to the bank for recovery, it becomes a document negotiable in itself on its own strength empowering the bank to effect recovery and creating the liabilities of the parties as regards prompt payment thereof. In such a situation, ignoring the intermittent acrobatics as to whether the amount c .....

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the imposition of tax does not get justified. In other words, unless the amount which is sought to be chargeable as the chargeable interest has any necessary relationship with loans and advances, such an attempt to understand the amount alone would not satisfy the requirement of justification. 15. Likewise, the Andhra Pradesh High Court in Commissioner of Income Tax v. State Bank of Hyderabad, [2014] 367 ITR 128 (AP) has also dissented from the Karnataka High Court s view. In addition, the Andhr .....

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tiable Instrument Act. The person who purchased the Bills of Exchange becomes the "bearer" thereof. Section 32 of the Negotiable Instrument Act, defines the liability of the concerned persons to discharge their respective obligations. However, it is difficult to imagine that the purchaser of the Bills of Exchange can be treated as a person who has advanced the loans, to the original borrower. For all practical purposes a different transaction altogether, comes into existence. The Madra .....

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nd in accordance with the terms of the agreement, that its constituents (borrowers), the bills were purchased by the assessee and on account of the delayed payment of bills, the assessee became entitled to liquidated damages by way of compensation from the borrower. The right to charge that amount by the assessee did not, therefore, arise on account of any delay in re-payment of any loan or advances made by the assessee. It may be that the amount payable by way of compensation for detention of a .....

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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 u/s 2 (7) of the Interest Tax Act. The 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 ambi .....

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enclature given to a transaction by the parties is not determinative of the due character/nature of that transaction. The definition as we have pointed out of ''interest'', shall not cover the amount received by the assessee after the due date. We have gone through the judgments rendered by various High Courts as quoted above and are not in conformity with the view of Karnataka and Punjab and Haryana High Court and we concur with the view of Madhya Pradesh & Kerala High Court .....

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st Tax Act and we answer this question in favour of the assessee and against the revenue. We are of the view that the Karnataka High Court s reasoning 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 interes .....

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as computation of chargeable interest is under Section 6. Section 2(7) is the heart of the matter as far as the present case is concerned. In accounting sense, there is a conceptual difference between loans and advances on the one hand and investments on the other hand. Section 2(7) defines the word interest to mean interest on loans and advances including commitment charges, discount on promissory notes and bills of exchange but not to include interest referred to under Section 42(1-B) of the R .....

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items, namely, commitment charges and discount on promissory notes and bills of exchange. In normal accounting sense, loans and advances , as a concept, is different from commitment charges and discounts and keeping in mind the difference between the three, the legislature, in its wisdom, has specifically included in the definition under Section 2(7) commitment charges as well as discounts. The fact remains that interest on loans and advances will not cover under Section 2(7) interest on bonds a .....

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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 l .....

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. Section 2(28A) defines interest as follows:- 2. Definitions.- In this Act, unless the context otherwise requires. [(28A) interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.] 18. It will be noticed that this definition is much .....

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tly out of a money transaction, unlike the word on 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, any moneys borrowed must be contrasted with loan or advances . 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 e .....

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