Overriding title in rediscounting interest excludes amounts diverted at source from chargeable interest

Under a refinancing or rediscounting scheme, interest diverted at source to the Reserve Bank of India and the Industrial Development Bank of India by an overriding title did not accrue to the assessee-bank. The bank acted only as a conduit and could retain only the portion of discounting charges actually allowed to it. Accordingly, only the amount retained by the bank formed part of its chargeable interest under the Interest-tax Act, 1974, and the diverted amount was excluded from tax computation.

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Issues: Whether rediscounting interest on bills, to the extent diverted to the Reserve Bank of India and the Industrial Development Bank of India under the refinancing scheme, accrued to the assessee-bank so as to form part of chargeable interest under the Interest-tax Act, 1974.

Analysis: The assessee-bank acted only as a medium for implementing the rediscounting scheme. Under the scheme, it could retain only a limited portion of the discounting charges, while the major portion stood diverted in favour of the Reserve Bank of India and the Industrial Development Bank of India by reason of an overriding title. On identical facts, an earlier Division Bench had held that the amount so diverted did not accrue to the bank and only the portion actually retained by it could be treated as its income. The present Bench accepted that view.

Conclusion: The rediscounting interest diverted to the Reserve Bank of India and the Industrial Development Bank of India did not form part of the assessee-bank's chargeable interest. The question was answered against the Revenue and in favour of the assessee.

Ratio Decidendi: Where, under a refinancing or rediscounting scheme, a portion of the interest is diverted at source by an overriding title in favour of another entity, only the amount actually accruing to and retained by the assessee can be included in chargeable interest.

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