Judgment:
ORDER
Per Shri T. N. C. Rangarajan judicial Member - These appeals relate to the computation of the chargeable interest under the Interest Tax Act.
2. The assessee is a scheduled bank. For the assessment year 1981-82 corresponding to the previous year ended 31-12-1980, the assessee filed a return declaring chargeable interest of Rs. 2,61,70,641. the IAC ( Assessment) however determined the chargeable interest at Rs. 2,70,48, 754. The assessee appealed and contended that interest paid by the assessee to Agricultural Refinance & Development Corporation and Industrial Development Bank of India amounting to Rs. 8,65,362 should be taken into account in determining the chargeable interest.
3. For the assessment years 1982-83, corresponding to the previous year ended 31-12-1981, the amount in dispute is Rs. 17,75,019. The CIT ( Appeals) agreed with the IAC (Assessment) that there is no provision for deducting the interest paid by the assessee in computing the chargeable interest and that it could not be said that the interest paid by the assessee amounted to diversion of income by overriding title. therefore, he confirmed the assessment on this point.
4. In the further appeals before us it was contended on behalf of the assessee that the re-financing schemes envisaged by the ARDC as well as the IDBI amounted to integrated transactions virtually using the assessee as an agent for carrying out the scheme and, therefore, the chargeable interest in the hands of the assessee could only be that amount of interest retained by it. It was submitted that in the circumstances only the net interest derived from these transactions could be brought to tax. On the other hand, it was contended on behalf of the revenue that the scheme envisaged two different transactions - one of borrowal by the assessee from the refinancing institutions and the other as the lending of money to the constituents. It was argued that the interest charged by the assessee on its lending became chargeable to interest tax and the other transaction would not in any way affect that charge. It was submitted that in the circumstances the additions must be sustained.
5. Before we consider the rival submissions, we have to set out the salient features of the schemes which were operated by the assessee. We shall first take the ARDC credit project. This scheme derives its course from an a garment dated 20-8-1979 between India acting by its President and the international Development Association called ' the Association'. That agreement provided that the association a greed to lend to India. an amount equivalent to two hundred and fifty million dollars ($ 250,000,000). This amount was to be utilised for exaction of certain projects. The manner of utilisation was to re-lend the amount to the agricultural Refinance Development Corporation which will under a sub-sidiary loan applications of the ultimate beneficiaries. The agreement stipulates various conditions for carrying out the project and has as its annexure a project agreement which states that the terms and conditions under which the ARDC will enter into subisidiary loan agreements. The agreement shows that the ARDC shall at all times manage and maintain its financial position by complete information and control over the participating banks which are required to maintain separate accounts for the projects. The schedule to that agreement provides that the ARDC is to give the amounts at stipulates rates of interest and the instalment of repayment is to coincide with the ultimate borrower. The rate of interest for the loan to be given to the ultimate borrower is also stipulates therein. It is further stipulated that the security to be obtained from the ultimate borrower shall be in accordance with the arrangement between the ARDC and the participating bank and any re- scheduling of loans is to be made only with the approval of the ARDC. Pursuant to this agreement there is another agreement dated 25-7-1981 entered into between ARDC and the Karur Vysya Bank Ltd. this again repeats the various conditions mentioned in the scheme referred to above and provides that the refinancing shall be by way of grant of loans to the participating commercial bank and the repayment shall be set to coincide more or less with the repayment schedule of loans granted to the beneficiaries. The security obtained is to be assigned to the ARDC and whatever amount is collected is to be immediately paid over to the ARDC. It also states that the participating bank should evaluate the project and sponsor only sound schemes thus implying that the corporation takes a risk of the loans. It may be mentioned that the original agreement stipulates the lending terms as not exceeding 9 years and refinancing as not exceeding 15 years. The agreement with the assessee-bank states that the lending to small farmers will be on 7 years for pump-sets and 15 years for all other minor irrigation and land development loans and for other 7 years for pump-sets and 9 years for minor irrigation projects and for other beneficiaries it will be 15 years for the minor irrigation investments. An important stipulation is that the loans shall not be re-payable on demand.
6. The agreement between the assessee and the IDBI is dated 23-8-1978 and contains stipulation which are almost the same as that with the ARDC Here again refinancing is given in the form of loans at the stipulasted rate of interest and the IDBI maintains complete control and requires the assessee to keep a separate account and furnish full information as well as assign security taken for the loans. In particular, there are stipulation in both the agreements to say that the assessee shall not increase the rate of interest or charge anything in excess of the interest rate prescribed and shall refund the difference wherever a concessional rate is prescribed. The assessee also agrees by both the agreements not to allow the constitutents any operation incounsistent with the loans or likely to jeopardise the loans. This agreement was replaced by another agreement dated 29-4-1981 which contains identical conditions.
7. A reading of these documents establishes the fact that the loans given by the assessee to the ultimate borrowers were part of an over all scheme laid down and controlled by the IBDI and the ARDC. No doubt, these agreements stated that the assessee will remain the principal debtor to the IDBI and the ARDC for the repayment of the refinance and the refinancing is carried out in the form of a loan. But the fact remains that the assessee had no discretion in respect of any part of the transaction. The assessee had to assign the securities obtained, charge only the rate of interest stipulated by the financial institutions and had to pay over the installments of the loans. We are, therefore, of the pinion that the entire transaction has to be considered as one integrated transaction and the interest accruing to the assessee must be ascertained only as arising from the entire transaction as such. Viewed in that manner, we are satisfied that only the net amount of interest accrued to the assessee.
8. It was conceded on behalf of the revenue relying on the decision in the case of CIT v. Canara Bank : [1989]175ITR601(KAR) that unless diversion by overriding title is established as in that case the amount paid to the re-financing institutions could not be excluded from the chargeable interest. But we find that that decision which had followed the decision of the Madhya Pradesh High Court in CIT v. State Bank of Indore : [1988]172ITR24(MP) actually supports our conclusion. those cases related to the bills re-discounting scheme of the IDBI where it was found that when the bills were re-discounted there was an overriding title to the IDBI. It was partiuarly mentioned by the court that the scheme viewed as a whole made it clear that the assessee-bank was a medium or conduit pipe for disbursement of the development fund for the implementation of the scheme for which it could retain up to 1.75 per cent which alone accorded to the bank and in respect of the remaining interest received from the purchaser on the advance made to him, there was an overriding title to the IBDI as the assessee bank had to part with the major portion of te discounting charges. The present schemes, in our opinion, are in no way different because here also the disbursements were on the basis of an overall scheme in which the assessee bank was only a participant entitled to retain only that portion as interest after making over the interest due to the IDBI and ARDC. In financial and commercial transactions especially banking transactions, we have to look at the matter from the point of view of the participants and in transactions of this typo we have to adopt the commercial view that only the not interest actually accrued to the assessee bank. Section 5 of the Interest Act gives the scope of chargeable interest as the total amount of interest accuring or arising to the bank in the 3 previous year. This accrual of interest has to be viewed only from a commercial stand point. Hence we are satisfied that it is only the net interest which accrued within the scope of section 5 and could be treated as chargeable interest. Hence we accept the contentions of the assessee that only the net interest accrued to the bank and, therefore, in computing the chargeable interest the amounts paid to the IDBI and the ARDC should be taken into account. We direct accordingly.
9. The assessee had received interest from Co-operative Land Development Bank amounting to Rs., 3,842 Rs. 12,751 and Rs. 42,375 in the previous years relevant to the assessment years 1979-80, 1981-82 and 1982-83 respectively. The contention of the assessee is that this interest is received on debentures issued by the said bank and was to be assessed as income from security in the income-tax assessment and therefore to be excluded from the interest under the Interest Tax Act. The CIT ( Appeals) accepted this contention. The revenue is in appeal to counted that the Cooperative Land Development Bank cannot be regarded as a company or corporation established by Central or State Act as required by section 18 of the Income-tax Act whose debentures would qualify for being considered as security under that section. But it is not in dispute that the interest received on the debentures issued by the Co- operative Land Development Bank has actually been assessed under the head Income from security under the Interest Tax Act, In the circumstances, we see no merit in these appeals of the revenue and we confirm the order of the CIT (Appeals) on this point.
10. For the year 1979 - 80 there is an issue relating to the claim of had debt amounting to Rs. 4,91,664. The Directors took a decision on 15-5-1979 to write of this amount as a had debt. The accounts relating to the years ended 31-12-1978 relevant to the assessment year 1979-80 was actually presented at the annual general body meeting in June 1979 after the Board of Directors had written off the amount and incorporated it in the accounts. The CIT (A) therefore accepts the contentions of the assessee that the bad debt and been written officer in the accounts of the assessee for the previous year during which it was establised to have become a had debt. In the appeal of the revenue it was counter did that in the income-tax proceedings the bad debt and had been allowed] only in the subsequent year and therefor consistent with that income-tax assessment the deduction should be denied. But we find that the CIT (Appeals) has taken note of the fact that while under the income-tax Act the ITO had a discretion to allow the bad debt in the year of write off or in another year there is no such discretion under the Interest Tax Act. WE also find narrated above that the debt has and actually been established or become had in the previous year and has also been written off in the accounts before a presentation to the annual general body meeting. Hence we see no reason to differ from the finding of the CIT (Appeals) and we accordingly confirm his order on this point.
11. In the result, the appeals of the assessee are allowed and the appeals of the revenue are dismissed.