1. The above captioned appeals were heard together and after hearing the learned representative of the parties, they are being disposed of as under : 2. These appeals by the assessee are directed against the consolidated order of the CIT(A) dt. 1st July, 1992 pertaining to the asst. yr.
1976-77 to 1979-80 and 1981-82 to 1986-87.
3. Ground No. 1 in all these appeals is general in nature and calls for no comments.
4. Ground No. 2 in all the appeals relates to the amount of subsidy received by the assessee-bank from the Reserve Bank of India (RBI). The subsidy was given by the RBI as an incentive for promoting exports. The assessee-bank had made advances to certain class of exporters. The interest charged on such advances was lower than the normal rates. It was the case of the assessee that the amount of subsidy is not liable to be charged to interest tax. This stand of the assessee was negatived by the AO. On appeal, the CIT(A) has upheld the action of the AO by placing reliance on the decision of the Karnataka High Court in the case of CIT vs. Vijaya Bank (1989) 175 ITR 611 (Kar).
5. We have heard the learned representative of the parties. In the above cited decision, the Honourable High Court has held that the export credit interest subsidy was paid by the RBI to offset a part of the loss incurred by the bank as a result of charging interest at lower rates than the normal rate of interest. The subsidy is thus linked with the loan advanced. In these circumstances, the Honourable High Court has held that the subsidy is to be included in the chargeable interest.
The learned counsel for the assessee has fairly admitted that this is the only decision available on the point and no decision to the contrary could be brought to our notice. Given the situation, we are of the view that the amount of subsidy has been rightly included in the chargeable interest. Hence, this ground of appeal is dismissed.
6. Ground No. 3 in all the appeals relates to the inclusion of the compensation received on bills of exchange for delay in payment of bills beyond the grace period. If the payment is delayed, then the assessee levied certain charges which were called 'overdue charges' or compensation for the delayed payment. It was the case of the assessee that the overdue interest constitutes liquidated damages for delay in payment of bills and such interest does not constitute interest within the meaning of s. 2(7) of the Interest-tax Act and, therefore, the same cannot be included in the chargeable interest. The assessee's stand was negatived by the AO.7. In the first appeal, the stand taken during the assessment proceedings was reiterated and reliance was placed on the decision of the Madhya Pradesh High Court in CIT vs. State Bank of Indore (1988) 172 ITR 24 (MP), wherein a similar issue had cropped up and the matter was decided in favour of the assessee. However, the CIT(A) observed that the view of the Madhya Pradesh High Court has been dissented from by the High Court of Karnataka in the case of State Bank of Mysore vs.
CIT (1989) 175 ITR 607 (Kar). The learned CIT(A) preferred to follow the decision of the Karnataka High Court and upheld the action of the AO.8. In the appeals before us, the learned counsel for the assessee has reiterated the assessee's stand. Besides placing reliance on the decision of the Madhya Pradesh High Court supra, the learned counsel has also referred to the under-mentioned decisions : 9. Opposing the submissions of the assessee, the learned representative of the Revenue has referred to s. 2(7) of the Interest-tax Act and has argued that the definition of the term 'interest' given in the Act is inclusive. According to him, what is chargeable for purposes of Interest-tax Act is the gross interest received by an assessee and not the interest and expenses. According to him, what is not to be included in 'interest' has been specified in the said provision. It was also submitted that whatever amount has been received by the assessee on account of delayed payment is nothing but interest. The learned Departmental Representative has also invited our attention towards the definition of the expression 'interest' as given in some dictionaries, viz., "Interest 'on the said sum', which sum is payable by instalments, means that the interest is payable on so much of the sum as from time to time shall be unpaid." "Interest : 1. The service charge for the use of money or capital, paid at agreed intervals by the user, and commonly expressed as annual percentage of outstanding principal.
10. We have given our anxious consideration to the submissions advanced before us and have gone through the decisions cited at the bar. There is considerable force in the stand of the Revenue that the amount paid or payable on account of delayed payments is in the nature of interest.
In fact, even the High Court of Madhya Pradesh in the above-mentioned decision has observed 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 both interest proper and interest by way of damages. Since the expression 'interest' has been defined in the Act, for purposes of Interest-tax Act, that definition has to be taken into consideration and after looking into that provision, the Honourable High Court of Madhya Pradesh had come to the conclusion that the compensation received on account of overdue payments does not constitute interest within the meaning of the expression 'interest' as envisaged in s. 2(7) of the Act. Although the High Court of Karnataka has adopted a different view, we find that the view adopted by the High Court of Madhya Pradesh has been referred to with approval by the High Court of Kerala in the case of State Bank of Travancore (supra). Moreover, the High Court of Madras in the case of Lakshmi Vilas Bank (supra) has held that interest on debentures cannot be considered as interest on 'loans and advances' liable to be taxed under the Interest-tax Act. It is thus obvious that any amount received in the nature of interest cannot be brought to tax under s. 2(7) of the Interest-tax Act. On a consideration of the submissions, the inference is inevitable that preponderance of judicial opinion supports the stand of the assessee. That apart, in CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC), the Honourable Supreme Court has held that when two views are possible in fiscal statutes, then the view which favours the assessee must be preferred and should prevail. In the given situation, we are inclined to decide the issue in favour of the assessee and it is hereby held that the overdue interest received on the demand bills on account of delay in payment of the bills beyond the grace period is not chargeable under the Interest-tax Act. Hence, ground No. 3 of the appeals is decided in favour of the assessee.
11. Ground No. 4 of the appeals relates to inspection charges brought to tax under the Interest-tax Act. The assessee-bank had been advancing loans to various parties against hypothecation of stocks, securities, etc. The bank's officials used to carry out inspection to verify such stocks and securities etc. The expenditure incurred on such inspections used to be recovered by the assessee-bank from the customers. It was the claim of the assessee that the inspection charges recovered by the assessee from its customers are not includible in the amount of chargeable interest. According to the assessee, such charges do not constitute 'interest'. The assessee's stand has been negatived by the AO as also by the CIT(A).
12. Assailing the findings of the Revenue authorities, the learned counsel for the assessee has argued that inspection charges are levied depending upon the conveyance expenses incurred by the bank's officials. The assessee has also filed a note on the inspection charges and it was stated that no inspection charges are levied on advances up to Rs. 5,000. For advances above Rs. 5,000 but up to Rs. 25,000, inspection charges are levied at the flat rate of Rs. 2.50 per inspection per borrower. However, the charges do not exceed Rs. 10 per year per borrower. It was also stated that for loans above Rs. 25,000, reasonable inspection charges are levied and care is taken to see that the inspection charges on advances to weaker sections in the priority sector are lower than those on other advances. Thus, it was contended that the inspection charges have been wrongly brought to tax. On the other hand, the learned Departmental Representative has supported the findings of the Revenue authorities.
13. Having considered the rival submissions, we find considerable force in the assessee's stand. There can be no manner of doubt that the inspections are carried out by the officials of the bank with a view to examine the securities offered by the customers and the intention behind such inspection is to verify the securities and protect the interest of the assessee-bank. Recovery of the expenditure incurred on such inspections cannot be termed as an interest on loans and advances.
In our considered opinion, the inspection charges are not liable to be included in the amount of chargeable interest. Hence, the addition made on this count is hereby deleted.
15. These appeals pertain to the asst. yrs. 1992-93 and 1993-94 and arise out of the orders of the CIT(A) dt. 8th January, 1996 and 28th June, 1996 respectively.
16. One of the issues in both the appeals relates to the inclusion of compensation/overdue interest on demand bills in the chargeable interest. For the reasons already discussed in the above-mentioned appeals (Nos. 11 to 20/Hyd/1992), we hold that the compensation/overdue interest received by the assessee on demand bills due to delay in payment of bills beyond the grace period does not constitute interest within the meaning of s. 2(7) of the Interest-tax Act. Hence, this issue is decided in favour of the assessee.
17. The next issue relates to the inspection charges. For the reasons already discussed above, we hold that the inspection charges received by the assessee also do not constitute interest within the meaning of s. 2(7) of the Act. Hence, the addition made by the Revenue authorities on that count is hereby deleted.
18. The last issue in both the appeals relates to the inclusion of the interest on securities in the computation of the chargeable interest.
The assessee's case was that interest on securities cannot be equated with interest on 'loans and advances' and thus it was contended that such interest falls outside the purview of s. 2(7) of the Interest-tax Act, 1974. The assessee's stand has been negatived by the Revenue authorities and as such the assessee is in appeal before the Tribunal.
19. The learned counsel for the assessee has submitted that it was never the intention of the legislature to bring to tax the interest on securities under the Interest-tax Act. In that connection, reference was made to the Finance Minister's speech of 31st July, 1974. Our attention was also invited towards the statement of objects and reasons given for introduction of the Interest-tax Act, 1974. It has been pointed out that in the statement of objects it has been clearly specified that interest on Government securities as also debenture and other securities issued by local authorities, companies and statutory corporations will not be included in the tax base. The learned counsel has also pointed out that while defining the expression 'interest' under s. 2(7) of the Act, any amount chargeable to income-tax, under the IT Act, under the head "interest on securities" was excluded. He has, however, admitted that the said section was substituted by Finance (No. 2) Act, 1991, w.e.f. 1st October, 1991, and in the substituted section, that exclusion has been omitted. It was argued that such exclusion from the section should not be interpreted to mean that interest on securities has become liable to tax. According to him, this exclusion has been omitted because the same was superfluous, and while interpreting a provision of the statute, aid can be taken from the speech of the Finance Minister and also from the statements of objects and reasons of the Act. In support of this proposition, reliance was placed on the under-noted decisions : 20. It was also argued that if the interest on securities is brought to tax under the Interest-tax Act, then the assessee, being a bank, has to pass on the burden to the borrower and in such situation, the intention of the legislature cannot be achieved. The learned counsel has also referred to the decision of the Madras High Court in CIT vs. Lakshmi Vilas Bank Ltd. (supra), wherein the Honourable High Court has held that interest on debentures cannot be considered as interest on loans and advances liable to be taxed under the Interest-tax Act.
21. Opposing the submissions of the assessee, the learned representative of the Revenue has argued that before 1st October, 1991, there was a specific provision in the Act excluding interest from securities from the purview of the definition of 'interest'. Exclusion of such interest from the definition of the term 'interest' has been deleted and this is sufficient to indicate that the interest on securities has been brought within the purview of s. 2(7) of the Act.
The learned Departmental Representative has also invited our attention towards s. 28 of the Act which empowers the Central Government to exempt any credit institution or any class of credit institutions or any category of loans or advances from the levy of interest-tax. It has been pointed out that in exercise of that power, the Central Government has issued Notification No. 9858 [F.No. 160/2/94-IT(A-I)] dt. 11th September, 1995, whereby the banking companies to which the Banking Regulation Act, 1949, applies have been exempted from the levy of interest-tax in respect of their income from interest on securities with effect from financial year 1995-96. Placing reliance on this notification, it was argued that the exemption could have been granted by the Government only if the interest on securities was otherwise taxable. As regards the decision of the Madras High Court cited supra, it has been pointed out that the said decision was rendered in connection with interest on debentures and as such the same cannot be applied to the facts of the present case. It was also argued that the provision of the section is very clear and unambiguous and, therefore, recourse to the speech of the Finance Minister or to the statement of objects of the Act cannot be looked into.
22. We have considered the submissions advanced before us. It is true that when the Interest-tax Act was introduced in Parliament, the intention was that interest on Government securities as also debentures and other securities issued by local authorities, companies and statutory corporations will not be included in the tax base. This is clear from a reading of the statement of objects and reasons of the Act. It appears that due to this intention, any amount chargeable to income-tax, under the IT Act, under the head "interest on securities", was specifically excluded for the purposes of the term 'interest' as defined in s. 2(7) of the Act. However, w.e.f. 1st October, 1991, s.
2(7) has been substituted and, therefore, the provision as contained in the original section cannot come to the rescue of the assessee, nor can the statement of objects and reasons, as given at the time of introduction of the bill, be of any assistance in the matter. The fact that the exclusionary clause has been deleted w.e.f. 1st October, 1991, is a sufficient indication that interest as on securities has now been included in the tax base. This belief is strengthened from the notification issued by the Central Government by exercise of the powers under s. 28, which has already been referred to earlier.
23. The learned counsel for the assessee also argued that the above-mentioned notification issued under s. 28 of the Act should be treated as retrospective and clarificatory in nature and applicable to the assessment year under consideration. We are unable to accept this argument inasmuch as the notification clearly states that the exempting has been granted with effect from the financial year 1995-96.
Therefore, this notification can be of no assistance to the assessee during the assessment years under reference.
24. In view of the foregoing reasons, we find no merit in the ground raised by the assessee on the point and the appeals fail on this ground.
26. These appeals have been filed by the Revenue and arise out of the consolidated order of the CIT(A) dt. 1st July, 1992, pertaining to the asst. yrs. 1985-86 and 1986-87.
27. The assessee-bank had not declared any interest on the balances in the 'protested bills account'. The AO had added a sum of Rs. 2,65,51,147 as chargeable interest for the asst. yr. 1985-86 by observing as follows : "3. The assessee has not declared any interest on the balances in the protested bills account. A sum of Rs. 2,65,51,147 was determined in the assessment for asst. yr. 1985-86 on the total sticky advances of Rs. 22,12,59,558 @ 12 per cent per annum and the same was assessed to income-tax following the Supreme Court's decision in the case of State Bank of Travancore vs. CIT (1986) 158 ITR 102 (SC). In appeal the CIT(A) while confirming the action of the AO in bringing to tax the interest on sticky advances, has however, directed to rework out the same on the basis of certain guidelines formulated by him, vide his order in ITA No. 75/IAC(A)-I/CIT-I/1987-88, dt. 29th July, 1988. This order is yet to be given effect on the basis of information filed by the assessee. For the purposes of interest-tax assessment, the interest of Rs. 2,65,51,147 as adopted in the income-tax assessment order is taken into account and added to the chargeable interest for the asst. yr. 1985-86, subject to rectification after passing the modification order in the income-tax assessment." 28. Similarly, in the asst. yr. 1986-87, for a period of 3 months from 1st January, 1985 to 31st March, 1985, the AO had added a sum of Rs. 82,90,093 being one-fourth of the interest on sticky advances considered in the income-tax assessment.
29. The assessee preferred appeals in both the years. The learned CIT(A) opined that s. 43D of the IT Act, which was introduced w.e.f.
1st April, 1991, is retroactive in nature and no notional interest can be brought to tax. Hence, the additions made by the AO were deleted.
The correctness of this order is being challenged in the appeals before the Tribunal.
30. The learned Departmental Representative has submitted that s. 43D was inserted by Finance (No. 2) Act, 1991, w.e.f. 1st April, 1991 and it does not speak that the same is retroactive and, therefore, the CIT(A) has erred in deleting the additions by applying the provision contained in the said section. He has also argued that the assessee is following mercantile system of accounting and as such, accrual of interest on sticky loans would not stop simply because the interest payable to the assessee has been transferred to the 'protested bills account'. He has referred to the decision of the Honourable Supreme Court in the case of State Bank of Travancore vs. CIT (1986) 158 ITR 102 (SC), in support of the proposition that interest accrues even on sticky advances. Reference was also made to the decision of the Supreme Court in Kerala Finance Corpn. vs. CIT (1994) 210 ITR 129 (SC) read with the corrigendum reported in (1996) 218 ITR 159 (SC), wherein the Honourable Supreme Court has held that interest accrued on 'sticky advances', which is debited to the account of the debtor under the mercantile system of accounting but the corresponding credit is taken to the suspense account, has to be treated as income of the assessee and as such taxable. Reliance was also placed on the decision of the Honourable Supreme Court in CIT vs. Shiv Prakash Janak Raj & Co. (P).
Ltd. (1996) 222 ITR 583 (SC).
31. The learned Departmental Representative has also invited our attention to the definition of the expression 'interest' as provided in s. 2(7) of the Interest-tax Act. He has also referred to ss. 4 and 5 of the said Act and has pointed out that s. 4 provides for charging of interest which accrues to an assessee. Referring to the proviso to s. 5 of the Act, it was submitted that the said proviso has become operative from 1st October, 1991, and the same was not there on the statute book during the relevant assessment years. Thus, it was contended that the assessee cannot derive any benefit out of the said proviso. The said proviso reads as under : "Provided that any interest in relation to categories of bad or doubtful debts referred to in s.43D of the IT Act shall be deemed to accrue or arise to the credit institution in the previous year in which it is credited by the credit institution to its P&L a/c for that year or, as the case may be, in which it is actually received by the credit institution, whichever is earlier." 32. The learned Departmental Representative has also contended that the accrual of interest in the instant case is certain and the matter may be sent back to the AO for quantification of such interest.
33. The submissions of the Revenue have been opposed by the learned counsel for the assessee. He has stated that in some cases suits for recovery have been filed by the assessee. He has also argued that the amount of interest, during the assessment years under reference, was transferred to 'protested bills account'. On a query by the Bench, the learned counsel has admitted that the accounts of the debtors were debited by the amount of interest. According to him, no interest was charged in the years under reference and as such there had been no accrual of interest and the same cannot be brought to tax. In support of this proposition, the learned counsel has referred to the decision of the Supreme Court in State Bank of Travancore vs. CIT (supra), and has read extensively from the headnote appearing at p. 105 of the report. Placing reliance on such observations, he has argued that from the mere fact that interest on sticky advances was charged to the concerned debtors by making debit entries in their respective accounts, no inference can be drawn that the assessee had regarded it as accrued income, because, simultaneously, such interest was credited to the 'protested bills account' and not to the P&L a/c. It was contended that by making such entries, the assessee must be regarded as having shown an intention to treat such interest as its hypothetical and not real income. It has been further argued that the accounts of the sticky loans are stagnant and, therefore, there had been no accrual of interest. In support of this proposition, reference was made to the decision of the Madras High Court in CIT vs. Jayalakshmi Trading Co.
(1995) 214 ITR 660 (Mad). Reference was also made to the decision of the Supreme Court in CIT vs. Hindustan Housing & Land Development Trust Ltd. (1986) 161 ITR 524 (SC), wherein it was observed that the right to enhanced compensation in the case of acquisition of land is an inchoate right and additional compensation does not accrue when the amount awarded is disputed by the Government by filing appeal. The learned counsel has also argued that s. 43B of the IT Act has been held to be retrospective in nature by the various High Courts and similar treatment may be given to the provision contained in s. 43D. In support of his submissions, the learned counsel has also referred to the under-mentioned decisions : 34. The learned counsel for the assessee has also referred to s. 5 of the IT Act and has submitted that under the IT Act the scope of 'total income' includes deemed accrual of income whereas in s. 5 of the Interest-tax Act there is no provision for deemed accrual. Thus, it was contended that interest on sticky loans did not accrue and cannot be brought to tax under the Interest-tax Act.
35. In rejoinder, the learned Departmental Representative has pointed out that the learned counsel for the assessee has read from the dissenting judgment of the Honourable Supreme Court in the case of State Bank of Travancore (supra). He has also pointed out that the interest has neither been waived by the assessee nor written off. He has also submitted that the assessee has not given any break-up to indicate as to in which cases suits have been filed and, therefore, the matter may be sent back to the AO for quantification of the interest accrued after examination of the individual cases. Referring to sub-s.
(2) of s. 4 of the Interest-tax Act, it was reiterated that accrual of interest is a certainty.
36. We have considered the submissions advanced before us as also the decisions cited by the learned representative of the parties. Sec. 4 of the Interest-tax Act relates to the charge of tax under the Act. Sec. 5 relates to the scope of 'chargeable interest'. At the relevant time, s.
5 read as under : "Scope of chargeable interest. - 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." A reading of the above provision makes it clear that the 'chargeable interest' of any previous year would mean the amount of interest accruing or arising to the bank in that previous year. Sec. 6 deals with the computation of chargeable interest. Sub-s. (1) thereof provides deduction in respect of interest which is established to have become a bad debt during the previous year. The Explanation to this sub-section provides that in computing the chargeable interest of a previous year, no deduction, other than the deduction specified in the sub-section, shall be allowed from the total amount of interest accruing or arising to the assessee. The Explanation also goes to indicate that no deduction from the amount of interest, accrued to the assessee can be allowed except the deduction as specified in s. 6(1) of the Act. The contention of the assessee that no interest had accrued on the sticky loans because the amount of interest was transferred to protested bills account cannot be accepted in view of the principle enunciated by the Honourable Supreme Court in the case of State Bank of Travancore (supra) and in the case of Kerala Financial Corporation (supra). It would also be appropriate to mention here that the learned counsel for the assessee can derive no benefit out of the dissenting order of the Honourable Supreme Court in the case of State Bank of Travancore (supra) because it is well settled that the majority judgment prevails and has binding effect. The contention of the assessee that s. 43D of the IT Act is retroactive and should be applied to the assessment years under reference is also not acceptable, because there is nothing in the Act to suggest that the said section would apply retrospectively.
37. In view of the foregoing discussions, we are of the view that the interest on sticky loans has accrued to the assessee during the years under reference and the same was rightly brought to tax by the AO and the CIT(A) has erred in deleting the additions by applying the provisions of s. 43D of the IT Act. As regards quantification of the interest, we find sufficient force in the submission of the learned Departmental Representative that for purposes of quantification the matter may be restored to the AO. We accordingly reverse the orders of the CIT(A) and restore the matter to the file of the AO for quantification of the interest which is to be included in the chargeable interest. The quantification should be done after affording an opportunity of hearing to the assessee. The assessee would be at liberty to produce the necessary details.