1988 (6) TMI 21 - HC - Income Tax

Court rules banking company's overdue interest & rediscounting charges as taxable interest.

State Bank Of Mysore Versus Commissioner Of Income-Tax

State Bank Of Mysore Versus Commissioner Of Income-Tax - [1989] 175 ITR 607, 74 CTR 52, 41 TAXMANN 275 Issues Involved: The judgment involves the taxation of rediscount charges and interest earned on overdue bills by a banking company for the year 1976-77.Issue 1 - Overdue Interest on Demand Bills:The Tribunal referred the question of whether the overdue interest on demand bills constitutes 'interest' under section 2(7) of the Interest-tax Act, 1974. The assessee contended that the amount charged on delayed payment of bills does not fall under 'interest on loans and advances' and is not taxable under the Act. The court considered legal interpretations from authorities like the Madhya Pradesh High Court and analyzed banking practices to determine that the amount in question qualifies as interest under the Act. It was established that interest includes compensation for delayed payment, and in this case, the overdue interest on demand bills is deemed chargeable interest under the Interest-tax Act.Issue 2 - Rediscounting Interest Paid on Bills:The Tribunal also raised the issue of whether the rediscounting interest paid on bills accrued to the assessee-bank due to diversion of discount to other financial institutions. The court referred to a previous order and focused on whether the sum representing rediscounting interest should form part of the chargeable interest under the Interest-tax Act. It was concluded that the transaction between the assessee and the financial institutions constituted a joint venture, leading to the sharing of interest paid by purchasers. The court upheld that the amount in question, related to rediscounting interest, should indeed be considered chargeable interest under the Act.Issue 3 - Joint Venture in Rediscounting of Bills:The third question raised by the Tribunal concerned the nature of the transaction between the assessee and financial institutions regarding the rediscounting of bills. The court deliberated on the joint venture aspect of the transaction, where interest paid by purchasers was shared between the parties involved. It was determined that the agreement to pay overdue interest at a specific rate in case of delayed payment indicated the nature of the transaction as interest-bearing, aligning with the provisions of the Interest-tax Act. The court ruled in favor of the Department, emphasizing that any amount collected for delayed payment constitutes chargeable interest, regardless of nomenclature.This comprehensive summary highlights the key issues addressed in the judgment, providing detailed insights into the court's reasoning and decisions on each matter.