TMI Blog2015 (11) TMI 869X X X X Extracts X X X X X X X X Extracts X X X X ..... irstly, 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 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 event which does not include within its ken interest payable on default in payment of amounts due under a discounted bill of exchange. In fact, when we come to the second point agitated in some of the appeals by revenue namely as to whether 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt, Kerala High Court, Andhra Pradesh High Court, Madras High Court and Rajasthan High Court have all decided that such amounts are not chargeable to tax as chargeable interest under the Interest Tax Act. On the other hand, the Karnataka High Court and the Punjab and Haryana High Court have differed from this view 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 notes and bills of exchange drawn or made in India, but does not include- (i) interest referred to in sub-section (1B) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); (ii) discount on treasury bills; 6. Under Section 4 of the said Act, there shall be charged on every scheduled bank for every assessment year a tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eptor 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 him and caused by such default. In most cases such loss or damage is a liquidated amount which can be calculated from the rate mentioned on the face of the bill of exchange. 10. The first thing that will be noticed is that the interest on which tax is payable under the Interest Tax Act is primarily on loans and advances made in India. By a deeming fiction, discount on bills of exchange made in India is also included. It is clear, therefore, that discount on bills of exchange would obviously not come 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 reasoni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n BILL OF EXCHANGE (24th Edition) at page 282 as follows: A banker clearly gives value for a bill when he discounts it, the transaction consisting of the purchase of the bill at a discount, i.e. allowing the interest for the time the bill has to 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. It is settled law that interest is damages or compensation for delayed payment of money due. 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. We have already held that Discounting of Bills is a form of advance or loan, and hence compensation paid on delayed payment of money due thereon is interest on loans and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted 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 has ready facilities for recovery, more statutory powers of stringent character and, therefore, the practice gets established that the makers hand over the overdue bills to the bank for recovery. It is thereafter that the bank sets in motion. In other words, what is undertaken by the bank is the recovery of the amount covered by the bill and in regard to which, by virtue of Section 32 of the Negotiable Instruments Act, 1881, a statutory liability is created with regard to the prompt payment. The 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 can be unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of the provisions of Sec. 32 of the Negotiable Instrument Act, 1881 and 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 sum of money due, can be said to be covered by the expression interest in its widest sense including interest proper and interest by way of damages but the provision of the Interest Tax Act can be said to be attracted only in case of interest received on loans and advances. However, the transaction ends on the due date occurs and the relationship of borrower lender ends. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest to include discount on bills of exchange. Indeed, this matter is no longer res integra. In CIT v. Sahara India Savings Investment Corpn. Ltd., (2009) 17 SCC 43, this Court while dealing with the definition contained in Section 2(7) of the Interest Tax Act, held:- Section 2(5) defines chargeable interest to mean total amount of interest referred to in Section 5, computed in the manner laid down in Section 6. In other words, the scope of chargeable interest is defined under Section 5 whereas 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 Reserve Bank of India Act, 1934 as well as discount on treasury bills . Section 2(7), therefore, defines what is interest in the first part and that first part confines interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 wider than that contained in Section 2(7) of the Interest Tax Act, 1974. The expression payable in any manner in respect of any moneys borrowed is an expression of considerable width. It will be noticed that the aforesaid language of the definition section 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 mus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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