Judgment:
1. This appeal under Section 260A of the Income-tax Act, 1961 read with Section 21 of the Interest Tax Act, 1974 is at the instance of an assessee and is directed against order dated 19th December, 2003 passed by the Income-tax Appellate Tribunal, “B” Bench, Kolkata, in Interest Tax Appeal No.11(Cal) of 1997 relating to the Assessment Year 1992-93 dismissing the appeal field by the assessee.
2. The facts giving rise to filing of this appeal may be summed up thus:
a) The appellant is a company mainly engaged in the business of insurance other than that of life insurance. The petitioner company is also categorized as Public Financial Institution under Section 4A of the Companies Act, 1956 and is also engaged in the investment activities like purchase and sale of shares, debentures, bonds, government securities etc. As part of its investment business, the appellant also provides various types of loans and advances to different companies as well as Credit Institutions under different schemes like term loans, loans under bill rediscounting scheme, loans by way of deposits as call money, loans against mortgage of property, loans to the State Governments for housing and firefighting equipment etc.
b) The appellant had filed its return of chargeable interest in respect of the previous year being the Financial Year ending 31st March, 1992 corresponding to the Assessment Year 1992-93 on 28th December, 1994 declaring its chargeable interest under the Interest Tax Act, 1974 as the sum of Rs.5,21,33,78/. In filing its return, the appellant claimed exemption from levy of interest tax as not forming part of the chargeable interest in respect of various items including the sum of Rs.16,97,65,816/- representing interest on bills rediscounting scheme with banks as per details given in the three statements.
c) The Assessing Officer, however, by the order dated 30th March, 1995 under Section 8(2) of the said Act held that interest on call money and bills rediscounting could not be termed as interest on loans and advances and accordingly held such interest to be part of chargeable interest.
d) Being dissatisfied, the appellant preferred an appeal under Section 15(1) of the Act before the Commissioner of Income-tax (Appeals) and the said authority by order dated 20th January, 1997 dismissed the same thereby holding that call money and bills rediscounting scheme with banks could not be termed as interest on loans and advances and that those were rightly included by the Assessing Officer in the appellant’s chargeable interest computed under Section 5 read with Section 6 of the Act.
e) Being dissatisfied, the appellant preferred an appeal before the Tribunal below. The said Tribunal by order dated 19th December, 2003 came to the conclusion that call money did not fall within the ambit of chargeable interest, but so far the interest on bills rediscounting scheme with banks were concerned, the same was chargeable as interest.
f) Being dissatisfied, the appeal has come up with the present appeal.
3. A Division Bench of this Court by order dated 28th April, 2004 formulated the following substantial questions of law for determination:
“I. Whether on the facts and in the circumstances of the case and on a correct interpretation of Section 2(7) read with Section 2(5) and Section 5 of the Interest Tax Act, 1974, the Income Tax Appellate Tribunal, ‘B’ Bench, Kolkata misdirected itself in law and it adopted a wholly erroneous approach in confirming that the sum of Rs.16,97,65,816 representing interest received by the appellant assessee company, from the banking companies governed by the Banking Regulation Act, 1949 under the Bills Rediscounting Scheme during the financial year relevant to the assessment year 1992-93, was not the interest on loans and advances made to other credit institutions, and that the same was part of chargeable interest being ‘discount on promissory notes and bills of exchange drawn or made in India’ and whether its such finding was wholly unreasonable and/or otherwise perverse.
“II. Whether on the facts and in the circumstances of the case the Tribunal misdirected itself in law and it adopted a wholly erroneous approach in confirming that the sum of Rs.16,97,65,816 representing interest received by the appellant assessee company from different banking companies under the Bills rediscounting scheme, not being interest on loans and advance made to other credit institutions, was not excluded from the definition of interest as contained in Section 2(7) of the Interest Tax Act, 1974.”
4. Therefore, the only question that falls for determination in this appeal is whether interest received by the appellant under the bills rediscounting scheme from different banking companies to which the Banking Regulation Act, 1949 applies should form part of chargeable interest within the meaning of Section 2(5) read with Sections 5 and 6 of the Interest Tax Act. In order to appreciate the question involved herein, it will be profitable to refer to the following provisions of the Interest Tax Act which are quoted below:
“Definitions. 2. In this Act, unless the context otherwise requires, –
(1) “assessee” means a person by whom interest-tax, or any other sum of money is payable under this Act and includes –
(a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his chargeable interest or of the amount of refund due to him or of the chargeable interest of any other person in respect of which he is assessable or of the amount of refund due to such other person;
(b) every person who is deemed to be an assessee in default under any provision of this Act;
(2) “assessment” includes reassessment;
(3) “Assessment year” means the period of twelve months commencing on the 1st day of April, every year;
(4) “Board” means the Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963);
(5) “chargeable interest” means the total amount of interest referred to in section 5, computed in the manner laid down in section 6;
“(5A) “credit institution” means, –
(i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act) or a cooperative society engaged in carrying on the business of banking not being a co-operative society providing credit facilities to farmers or village artisans;
(ii) a public financial institution as defined in section 4A of the Companies Act, 1956 (1 of 1956);
(iii) a State financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951(63 of 1951); and
(iv) any other financial company; “(5B) “financial company” means a company, other than a company referred to in sub-clause (i), (ii) or (iii) of clause (5A), being–
(i) a hire-purchase finance company, that is to say, a company which carries on, as its principal business, hire-purchase transactions or the financing of such transactions;
(ii) an investment company, that is to say, a company which carries on, as its principal business, the acquisition of shares, stock, bonds, debentures, debenture stock, or securities issued by the Government or a local authority, or other marketable securities of a like nature;
(iii) a housing finance company, that is to say, a company which carries on, as its principal business, the business of financing of acquisition or construction of houses, including acquisition or development of land in connection therewith;
(iv) a loan company, that is to say, a company not being a company referred to in sub-clauses (i) to (iii) which carries on, as its principal business, the business of providing finance, whether by making loans or advances or otherwise;
(v) a mutual benefit finance company, that is to say, a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act, 1956 (1 of 1956), to be a Nidhi or Mutual Benefit Society; or
(vi) a miscellaneous finance company, that is to say, a company which carries on exclusively, or almost exclusively, two or more classes of business referred to in the preceding sub-clauses;
“(7) “interest” means interest on loans and advances made in India and includes–
(a) commitment charges on unutilized portion of any credit sanctioned for being availed on 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;
“Scope of chargeable interest. 5.
Subject to the provisions of this Act, the chargeable interest of any previous year of a credit institution shall be the total amount of interest other than interest on loans and advances made to other credit institutions accruing or arising to the credit institution in that previous year: Provided that any interest in relation to categories of bad or doubtful debts referred to in section 43D of the Income-tax 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 profit and loss account for that year or, as the case may be, in which it is actually received by the credit institution, whichever is earlier.
“Computation of chargeable interest. 6.
(1) Subject to the provisions of sub-section (2), in computing the chargeable interest of a previous year, there shall be allowed from the total amount of interest other than interest on loans and advances made to credit institutions accruing or arising to the assessee in the previous year, a deduction in respect of the amount of interest which is established to have become a bad debt during the previous year. Provided that such interest has been taken into account in computing the chargeable interest of the assessee of an earlier previous year and the amount has been written off as irrecoverable in the accounts of the assessee for the previous year during which it is established to have become a bad debt.
Explanation : For the removal of doubts, it is hereby declared that in computing the chargeable interest of a previous year, no deduction, other than the deduction specified in this sub-section shall be allowed from the total amount of interest accruing or arising to the assessee.
(2) In computing the chargeable interest of a previous year, the amount of interest which accrues or arises to the assessee before the 1st day of August, 1974, or during the period commencing on the 1st day of March, 1978, and ending with the 30th day of June, 1980, or during the period commencing on the 1st day of April, 1985 and ending with the 30th day of September, 1991, shall not be taken into account.” (Emphasis supplied by us).
5. After hearing the learned counsel for the parties and after going through the materials on record, there is no dispute that the appellant is a credit institution being a Public Financial Institution as defined in Section 4A of the Companies Act, 1956 (1 of 1956) and thus, is an assessee under the Act. It appears from the definition of the interest as provided in Section 2(7) of the Act, “interest” means interest on loans and advances made in India and includes–
a) commitment charges on unutilized portion of any credit sanctioned for being availed on 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 subsection (1B) of Section 42 of the Reserve Bank of India Act, 1934 (2 of 1934) and
ii) discount on treasury bills. Therefore, interest received by the assessee under the bills rediscounting scheme from different banking companies to which the Banking Regulation Act, 1949 applies is also interest within the meaning of the Act. However, as provided in Section 5 of the Act, chargeable interest for the purpose of the Act does not include all the interest received by a credit institution and it specifically excludes the interest on loans and advances made to other credit institutions accruing or arising to the credit institution in that previous year. Similarly, in Section 6 of the Act, providing mode of computation of the chargeable interest, the legislature has explicitly excluded interest on loans and advances made to credit institutions.
6. Thus, the interest received by the assessee on loans and advances made under the bills rediscounting scheme from different banking companies to which the Banking Regulation Act, 1949 applies does not form part of chargeable interest defined under the Act and no tax is payable on such amount. We, therefore, find that the Tribunal below committed substantial error of law in assessing tax on the interest received by the assessee on loans and advances made under the bills rediscounting scheme from different banking companies to which the Banking Regulation Act, 1949 applies by misreading the provisions contained in Sections 5 and 6 of the Act.
7. We, consequently, set aside the order of the Tribunal below and direct the assessing officer to exclude the amount of interest received by the appellant on loans and advances made under the bills rediscounting scheme from different banking companies to which the Banking Regulation Act, 1949 applies. The appeal is, thus, allowed by answering both the questions framed by the Division Bench in this appeal in the affirmative and against the Revenue.
8. In the facts and circumstances, there will be, however, no order as to Costs.