TMI Blog1995 (2) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... 1975. The assessee is a non-nationalised banking company. The assessee has made loans and advances to various parties at specified rates of interest. The Interest-tax Act, 1974, came into force with effect from August 1, 1974. That Act provided that tax will be levied on banking companies at the rate of seven per cent. on the amount of interest accruing or arising to the bank in the relevant accounting year. So the assessee-bank found out a device by which that seven per cent. or a substantial portion of it could be passed on to the debtors or reimbursed. So the assessee issued a circular to its branch offices, which reads as follows : " Bank of Madura Limited, Central Office, Madurai. Accounts and Statistics 19th Dec. 1974 BID/CIR : GEN : MISC. : 57/74 28th Aghn. 1896 CIRCULAR Interest-tax Act, 1974, seven per cent. tax on interest, loans and advances ------------ The Interest-tax Act, 1974, enacted by Parliament recently, envisages the levy of a special tax at seven per cent. on the total amount of interest, accruing or arising to banks every accounting year. Consequently, it has been decided to collect the special taxes from the borrowers for payment to the Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax assessment. But the assessee contended in interest tax proceedings that it is not interest and, therefore, not chargeable to tax under the Interest-tax Act. The income-tax authorities decided against the assessee. Aggrieved, the assessee filed appeals before the Appellate Tribunal. The Tribunal held that the amount so collected is not interest within the meaning of "interest" in section 2(7) of the Interest-tax Act, because, according to the Tribunal, it is not interest on loans and advances, but only interest on interest. Before the Tribunal, the assessee made an alternative submission. According to the assessee, it was not interest at all either in law or under any statute for the time being in force. The Tribunal, accordingly, classified the amount into two categories, viz., amounts paid by the debtors voluntarily and the amounts paid by the party as part of the contract. According to the Tribunal, what is paid voluntarily is not interest and what is paid as per the terms of the contract is interest. Therefore, the Tribunal originally thought that the case must be referred back for determination of the amounts falling under these two categories, but since the Tribunal ult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under various heads. All these amounts would not come under the caption "interest". The assessee is paying the advance tax under the Interest-tax Act, 1974, every three months. There is no prohibition for the assessee-bank to collect this seven per cent. tax from the borrowers. Since the assessee-bank used to collect this tax amount from the borrowers and paying the same as tax under the Interest-tax Act, 1974, by diversion by overriding title, the assessee has no interest over this amount. The assessee-bank is not collecting seven per cent. on the amounts advanced. The collection of seven per cent. is on the interest payable by the borrowers. If once this collection does not come under the purview of interest, as contemplated under the Interest-tax Act, 1974, then no tax under the said Act can be levied. This seven per cent. was collected from the borrowers not along with the 12 per cent. interest charged by the assessee-bank. But this seven per cent. is collected separately under a different head and credited in the books of account under the head "Special tax accounts". For all these reasons, it was submitted, that the Tribunal was correct in holding that the seven per cent. o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or after the 1st day of April, 1975, a tax (in this 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. " Section 5 deals with the scope of chargeable interest as, "subject to the provisions of this Act, the chargeable interest of any previous year of a scheduled bank shall be the total amount of interest (other than interest on loans and advances made to scheduled banks) accruing or arising to the bank in that previous year.....". According to the assessee-bank, the seven per cent. amount collected by it was credited in its books of account under the caption "Special tax accounts". The assessee offered these amounts collected by it for income-tax purposes. According to the assessee, the seven per cent. collected from the borrowers has no connection with the loans and advances made to the borrowers. In fact, the tax payable by the assessee-bank was collected from the borrowers. Therefore, it will not come under the definition of interest under the Interest-tax Act. It is the case of the assessee that by diversion by overriding title the amount collected by the assessee-bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case would have been different, if such an overriding charge had existed either upon the property or upon its income, which is not the case." According to the facts arising in the present case, the assessee-bank collected the amounts and then paid the tax under the Interest-tax Act. If once the collection reached the hands of the assessee, then it is not possible to say that the principle of diversion by overriding title would apply. Learned counsel appearing for the assessee relied upon a decision in CIT v. State Bank of Indore [1988] 172 ITR 24 (MP). According to the facts arising in this case, the assessee, a banking-company, purchased bills of exchange drawn by its constituents, and in some cases, on account of delay in payment beyond the days of grace, received liquidated damages byway of compensation. In the assessment proceedings under the Interest-tax Act, the assessee claimed that the amount received as damages was not interest on loans and advances exigible to tax under the Interest-tax Act. The assessee further contended that it had to pay to the Industrial Development Bank of India rediscounting charges and after adjusting that amount against the discount charges r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... collect the tax payable by it from its borrowers under the various heads for various purposes. The bank was charging interest at 12 per cent. on the amount advanced by it to its borrowers. The amount of seven per cent. collected from the borrowers is for the purpose of paying tax under the Interest-tax Act. In fact, the collection of these amounts has no nexus with the amount advanced by the assessee-bank to its borrowers. In reality, it is interest on interest. It is stated that there is an oral contract between the borrowers and the bank for the payment of seven per cent. on the borrowed amount. The amount collected at seven per cent. by the bank was paid as tax under the Interest tax Act, 1974. The assessee-bank is also offering this seven per cent. collection for income-tax purposes and income-tax was levied thereon. The assessee-bank has to pay advance tax every three months. Therefore, the amount collected by the assessee-bank, though it reached its hands, ultimately went into the coffers of the Government. The assessee-bank is not appropriating the said amount for its own benefit. Under the law there is no prohibition for such collection. Thus, considering the facts arising ..... X X X X Extracts X X X X X X X X Extracts X X X X
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