Integrated lending arrangement taxed only on net interest accruing to the bank; settled law upheld the deletion of the addition.

The Madras HC upheld deletion of an addition of chargeable interest under the Interest-tax Act where prior decisions had already settled the treatment and no contrary authority had displaced that position. It also held that a lending and refinancing structure involving the bank, financing corporations and ultimate borrowers was a single integrated transaction, so the bank acted only as an intermediary for the portion contractually payable onward and was taxable only on the net interest actually accruing to it. As the Revenue failed to show any referable question of law, the tax case petition was dismissed.

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Issues: (i) Whether the deletion of additions made to chargeable interest under section 19 of the Interest-tax Act, 1974 was justified in respect of the sum of Rs. 19,726. (ii) Whether the lending arrangement between the bank, the Agricultural Development Refinance Corporation, the Industrial Development Bank of India, and the constituents constituted one integrated transaction so that only the net interest accrued to the assessee could be brought to tax.

Issue (i): The first addition was covered by prior decisions holding the relevant treatment to be in accordance with law. Those decisions had neither been reversed by the Supreme Court nor shown to have been displaced by any contrary authority. In that situation, no reference was called for merely to restate the settled position.

Conclusion: The deletion of the addition of Rs. 19,726 was upheld.

Issue (ii): The lending mechanism was found to be a single integrated arrangement beginning with the funds made available through the Industrial Development Bank of India and the Agricultural Development Refinance Corporation and ending with the ultimate borrowers. The bank received and remitted interest under the governing agreements, and for the portion payable to the financing institutions it functioned only as an intermediary. On that footing, the whole interest received from constituents did not accrue to the bank as its taxable income.

Conclusion: The Tribunal was right in treating the arrangement as an integrated transaction and in bringing only the net interest to tax.

Final Conclusion: The Revenue failed to establish any referable question of law, and the tax case petition was dismissed.

Ratio Decidendi: Where lending and refinancing arrangements are structured so that part of the interest is contractually payable onward to another financing institution, the recipient bank is taxable only on the net interest that truly accrues to it.

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