TMI Blog2002 (11) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... I.T.A. Nos. 883, 884, 885/Coch. of 1990, 7 and 8/Coch. of 1991 and 271/Coch. of 1991 in the case of Dhanalakshmi Bank, Thrissur. (I.T.A. No. 11 of 2001 filed against I.T.A. No. 883 of 1990 which was disposed of by the Tribunal by the common order is being dealt with separately since one more question is involved in the said appeal). I.T.A. No. 83 of 2002 arises out of the order of the Tribunal in I.T.A. No. 79 of 1994 in respect of the assessment year 1990-91 in the case of South Indian Bank Ltd., Thrissur. Similarly, I.T.A. Nos. 127 of 2001 and 135 of 2001 arise out of the order of the Tribunal in I.T.A. Nos. 295 and 296 of 1993 in respect of the assessment years 1988-89 and 1989-90 in the case of Catholic Syrian Bank Ltd., Thrissur. All these appeals are being disposed of by this judgment since the sole question that arises for consideration in all these cases is as to whether the Tribunal is right in law in holding that the rate of penal interest the assessee has to pay under the relevant banking law is interest only and not penalty. In other words, the question is as to whether the payment of penal interest under the banking laws is for the infraction of law. The respondent- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary to refer to the relevant provisions of the Income-tax Act as well as the relevant provisions of the Banking Regulation Act and the Reserve Bank of India Act under which the penal interest is paid by the asses sees to the Reserve Bank of India and on which the claim for deduction is made. Section 37 of the Income-tax Act, 1961, provides that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . In the instant case there is no dispute that the payment of penal interest is not in the nature of a capital expenditure or personal expenses of the assessees. There is also no dispute that the penal interest is paid as an incidence of the banking business of the assessees. In other words, the penal interest paid to the Reserve Bank of India can be treated as laid out or expended wholly and exclusively for the purposes of the business of the assessees' banks. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regional Rural Bank, also any loan taken by such bank from its sponsor bank; (d) the aggregate of the liabilities of a scheduled bank which is not a State Co-operative Bank, to,-- (i) the State Bank; (ii) a subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959); (iii) a corresponding new bank constituted by section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970); (iiia) a corresponding new bank constituted by section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980); (iv) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); (v) a co-operative bank; or (vi) any other financial institution notified by the Central Government in this behalf, shall be reduced by the aggregate of the liabilities of all such banks and institutions to the scheduled bank; (e) the aggregate of the 'liabilities' of a scheduled bank which is a State co-operative bank, to,-- (i) the State Bank; (ii) a subsidiary bank as defined in section 2 of the State Bank of India (Subsidiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount by which such balance at the bank falls short of the prescribed minimum. (3A) When under the provisions of sub-section (3) penal interest at the increased rate of five per cent. above the bank rate has become payable by a scheduled bank, if thereafter the average daily balance held at the bank during the next succeeding fortnight is still below the prescribed minimum,-- (a) every director, manager or secretary of the scheduled bank, who is knowingly and wilfully a party to the default, shall be punishable with fine which may extend to five hundred rupees and with a further fine which may extend to five hundred rupees for each subsequent fortnight during which the default continues, and (b) the bank may prohibit the scheduled bank from receiving after the said fortnight any fresh deposit, and, if default is made by the scheduled bank in complying with the prohibition referred to in clause (b), every director and officer of the scheduled bank who is knowingly and wilfully a party to such default or who through negligence or otherwise contributes to such default shall in respect of each such default be punishable with fine which may extend to five hundred rupees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h such securities have not been drawn against or availed of. (2) In computing the amount for the purposes of sub-section (1), the deposit required under sub-section (2) of section 11 to be made with the Reserve Bank by a banking company incorporated outside India and any balances maintained in India by a banking company in current account with the Reserve Bank or the State Bank of India or with any other bank which may be notified in this behalf by the Central Government, including in the case of a scheduled bank the balance required under section 42 of the Reserve Bank of India Act, 1934 (2 of 1934), to be so maintained, shall be deemed to be cash maintained in India. (2A)(a) Notwithstanding anything contained in sub-section (1), or in sub-section (2), after the expiry of two years from the commencement of the Banking Companies (Amendment) Act, 1962 (36 of 1962):-- (i) a scheduled bank, in addition to the average daily balance which it is, or may be, required to maintain under section 42 of the Reserve Bank of India Act, 1934 (2 of 1934), and (ii) every other banking company, in addition to the cash reserve which it is required to maintain under section 18, shall ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Reserve Bank in the prescribed form and manner a monthly return showing particulars of its assets maintained in accordance with this section, and its demand and time liabilities in India at the close of business on each alternate Friday during the month, or if any such Friday is a public holiday, at the close of business on the preceding working day: Provided that every Regional Rural Bank shall also furnish a copy of the said return to the National Bank. (4)(a) If on any alternate Friday or, if such Friday is a public holiday, on the preceding working day, the amount maintained by a banking company at the close of business on that day falls below the minimum prescribed by or under clause (a) of sub-section (2A), such banking company shall be liable to pay to the Reserve Bank in respect of that day's default, penal interest for that day at the rate of three per cent. per annum above the bank rate on the amount by which the amount actually maintained falls short of the prescribed minimum on that day; and (b) if the default occurs again on the next succeeding alternate Friday, or, if such Friday is a public holiday, on the preceding working day, and continues on suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Friday is a public holiday, the next preceding working day, is still below, the prescribed minimum, every director, manager or secretary of the banking company, who is knowingly and wilfully a party to the default, shall be punishable with fine which may extend to five hundred rupees and with a further fine which may extend to five hundred rupees for each subsequent alternate Friday or the preceding working day, as the case may be, on which the default continues. (8) Notwithstanding anything contained in this section, if the Reserve Bank is satisfied, on an application in writing by the defaulting banking company, that the banking company had sufficient cause for its failure to comply with the provisions of clause (a) of sub-section (2A), the Reserve Bank may not demand the payment of the penal interest. Explanation.--In this section, the expression 'public holiday' means a day which is a public holiday under the Negotiable Instruments Act, 1881 (26 of 1881). Before proceeding further with the matter it is necessary to bear in mind the legal principles based on which a payment has to be determined as compensatory or penal in nature. The Andhra Pradesh High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the said section, the tax has to be paid by the registered dealer into the Government Treasury along with the return to be filed by him under section 32 of the said Act. This decision of the Andhra Pradesh High Court was specifically approved by the Supreme Court in Prakash Cotton Mills (P.) Ltd. v. CIT [1993] 201 ITR 684 in the following words: The decision of this court in Mahalakshmi Sugar Mills Co. [1980] 123 ITR 429 and the decision of the Division Bench of the Andhra Pradesh High Court in Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113 with the views of which we are in complete agreement, are, in our opinion, decisions which settle the law on the question as to when an amount paid by an assessee as interest or damages or penalty could be regarded as compensatory (reparatory) in character as would entit1e such assessee to claim it as an allowable expenditure under section 37(1) of the Income-tax Act. Therefore, whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Income-tax Act, the assessing authority is required to examine the scheme of the provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anding balance of sales tax is not penal and that it is compensatory in nature and is an allowable deduction in computing the profits of a business. The Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 considered the question as to whether the interest paid by the appellant-company, engaged in the business of the manufacture and sale of sugar, under section 3(3) of the U.P. Sugarcane Cess Act, 1956, on arrears of cess payable on the entry of the cane into the premises of a factory for use, consumption or sale therein and after considering the relevant provisions of the Cess Act held that the interest paid under section 3(3) of the Cess Act was not a penalty paid for any infringement of the law and was an allowable deduction under section 1O(2)(xv) of the Indian Income-tax Act, 1922. The very same question came up for consideration before this court in CIT v. Travancore Electro Chemical Industries Ltd. [1995] 211 ITR 775. The question that arose for consideration was as to whether the interest payable under the Electricity Supply Act is in the nature of penalty which cannot be allowed as a deduction under section 37 of the Income-tax Act. This court relyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture incurred wholly and expusively for the purpose of business and, therefore, liable to be deducted under section 37(1) of the Act. The Madras High Court in CIT v. Chemical Constructions [2000] 243 ITR 858 considered the question as to whether penalty imposed under section 10A of the Central Sales Tax Act for violation of the terms of the statute can be treated as penalty for infraction of law. The Madras High Court noted the Supreme Court in Malwa Vanaspati and Chemical Co. v. CIT [1997] 225 ITR 383 which has taken the view that the fact that a levy is termed as a penalty in a statute is not by itself decisive of its true character and observed that it is only when a levy does not have any compensatory character that it has to be regarded as penalty. The Supreme Court in Malwa Vanaspati's case [1997] 225 ITR 383 was concerned with the question, inter alia, with the levy of penalty under section 8 of the Madhya Pradesh General Sales Tax Act, which provides for a penalty in cases where raw materials purchased by a registered dealer are utilised for any purpose other than the purpose specified in sub-section (1) of section 8 of that Act. As per the said section the penalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Banking Regulation Act under which the assessees had paid penal interest. We have already extracted the relevant provisions in the aforesaid two enactments. Section 42 of the Reserve Bank of India Act, 1934, sub-section (1) thereof provides that every bank included in the Second Schedule (admittedly the assessees' banks squarely fall within the said Schedule) shall maintain with the bank an average daily balance the amount of which shall not be less than three per cent. of the total of the demand and time liabilities in India of such bank as shown in the return referred to in sub-section (2). Sub-section (1A) provides that notwithstanding anything contained in sub-section (1), the bank may, by notification in the Gazette of India, direct that every scheduled bank shall, with effect from such date as may be specified in the notification, maintain with the bank, in addition to the balance prescribed by or under sub-section (1), an additional average daily balance the amount of which shall not be less than the rate specified in the notification, such additional balance being calculated with reference to the excess of the total of the demand and time liabilities of the bank as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such prohibition is retained by the scheduled bank. Sub-section (4) provides that any scheduled bank failing to comply with the provisions of sub-section (2) shall be liable to pay to the bank a penalty of one hundred rupees for each day during which the failure continues. Sub-section (5)(a) provides that the penalties imposed by sub-sections (3) and (4) shall be payable within a period of fourteen days from the date on which a notice issued by the bank demanding the payment of the same is served on the scheduled bank, and in the event of failure of the scheduled bank to pay the same within such period, may be levied by a direction of the principal civil court having jurisdiction in the area where an office of the defaulting bank is situated, such direction to be made only upon an application made in this behalf to the court by the bank and under clause (b) when the court makes a direction under clause (a), it shall issue a certificate specifying the sum payable by the scheduled bank and every such certificate shall be enforceable in the same manner as if it were a decree made by the court in a suit. Clause (c) of sub-section (5) provides that notwithstanding anything contained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of, the following methods of valuation, namely, valuation with reference to cost price, market price, book value or face value, as may be specified by the Reserve Bank from time to time, an amount which shall not, at the close of business on any day, be less than twenty-five per cent. or such other percentage not exceeding forty per cent. as the Reserve Bank may, from time to time, by notification in the Official Gazette, specify, of the total of its demand and time liabilities In India, as on the last Friday of the second preceding fortnight. Under sub-section (3) for the purpose of ensuring compliance with the provisions of this section every banking company shall, not later than twenty days after the end of the month to which it relates, furnish to the Reserve Bank in the prescribed form and manner a monthly return showing particulars of its assets maintained in accordance with this section, and its demand and time liabilities in India at the close of business on each alternate Friday during the month, or if any such Friday is a public holiday, at the close of business on the preceding working day. Sub-section (4)(a) provides that if on any alternate Friday or, if such Frida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a banking company, if thereafter the amount required to be maintained on the next succeeding alternate Friday, or if such Friday is a public holiday, the next preceding working day, is still below the prescribed minimum, every director manager or secretary of the banking company, who is knowingly and wilfully a party to the default shall be punishable with fine which may extend to five hundred rupees and with a further fine which may extend to five hunderd rupees for each subsequent alternate Friday or the preceding working day, as the case may be, on which the default continues. Sub-section (8) provides that notwithstanding anything contained in this section, if the Reserve Bank is satisfied, on an application in writing by the defaulting banking company that the banking company had sufficient cause for its failure to comply with the provisions of clause (a) of sub-section (2A), the Reserve Bank may not demand the payment of the penal interest. From the aforesaid provisions of the two enactments it would appear that those two sections contain provisions of compensatory nature as well as penal interest. We draw the said conclusion particularly with reference to sub-section (3A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ohibition in receiving any fresh deposits. We also notice in this connection the provisions regarding penalties contained in Chapter V of the Reserve Bank of India Act, section 58D thereof which says that nothing contained in section 58B shall apply to or in respect of any matter dealt with in section 42. Section 58B, it must be noted, deals with penalties. It is all the more important to note that if the assessees banks are able to satisfy the Reserve Bank of India on application in writing that the bank had sufficient cause for its failure to comply with the provisions of the Reserve Bank of India Act the Reserve Bank can condone the default and not to demand the payment of penal interest. If as a matter of fact the penal interest is being paid for infraction of law there is no question of waiving the penal interest at all. Sub-section (8) of section 24 of the Banking Regulation Act and sub-section (7) of section 42 of the Reserve Bank of India Act gives power to the Reserve Bank to exempt a bank from the requirement regarding the compliance with sections 24 and 42(1), respectively, of the said Acts. Thus, on a consideration of the relevant provisions of the aforesaid two enac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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